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Trade Execution: Rules Your Brokerage Firm Must Follow

Jan. 16, 2013

Broker-dealers that are exchange specialists or Nasdaq market makers have special functions in the securities markets because they trade for their own accounts while also handling orders for customers. These special functions require them to comply with specific SEC rules—Rules 11Ac1-1 and 11Ac1-4 under the Securities Exchange Act of 1934—regarding the publishing of quotes and handling customer orders.

These rules, which include the "Quote Rule" and the "Limit Order Display Rule," aim to increase the information that is publicly available concerning the prices at which investors may buy and sell exchange-listed and Nasdaq Market System securities.

Quote Rule

The Quote Rule requires specialists and market makers to provide quotation information. The quote information the specialist or market maker publishes must be the best prices at which he is willing to trade (the lowest price the dealer will accept from a customer to sell the securities and the highest price the dealer will pay a customer to purchase the securities).

A specialist or market maker may still trade at better prices in certain private trading systems, called electronic communications networks, or ECNs, without publishing an improved quote. This is true only when the ECN itself publishes the improved prices and makes those prices available to the investing public. The Quote Rule ensures that the public has access to the best prices at which specialists and market makers are willing to trade—even if those prices are in private trading systems.

Limit Order Display Rule

Limit orders are orders to buy or sell securities at a specified price. The Limit Order Display Rule requires that specialists and market makers publicly display certain limit orders they receive from customers. If the limit order is for a price that is better than the specialist's or market maker's quote, the specialist or market maker must publicly display it. The rule benefits investors because the publication of trading interest at prices that improve specialists' and market makers' quotes present investors with improved pricing opportunities.

We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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