FINRA Rules Related to Transactions & Quotations

Instructor: Yusuf Abdullah

Yusuf has taught Science and Mathematics at school level and Finance and Economics at University level. He has recently earned his Ph.D in Financial Econometrics field.

This lesson provides an overview of FINRA Rules related to transactions and quotations. You'll learn about FINRA Rule 5210, FINRA Rule 5220, and FINRA Rule 5260.

Quotes and Transactions

Did you know that the Financial Industry Regulatory Authority (FINRA) is a self-regulating body that makes rules for brokers, traders, and dealers and enforces them?

FINRA is tasked with making sure that the brokerage firms and the dealers follow rules as laid down by the body. These rules relate to trading, prices & quotes, delivery, etc. of the securities. These rules attempt to provide a level playing field for both the traders as well as the investors. Now you may ask if self-regulation can lead to malpractices? The answer to that question would be a yes. However, since the rules are made by different competitive parties and the fact that FINRA is itself overseen by the SEC, the chances of malpractices happening are pretty slim.

You would think that FINRA would have rules that provide proper pricing and liquidity in the market. This is obvious because pricing is the most important aspect of any security. The specific rule that relates to pricing or quotes is Series 5200, which is named as Quotations and Trading Obligations and Practices. This rule consists of 9 subparts, which are numbered as 5210 to 5290. The rules that relate to transactions and quotations are discussed in detail in the following sections.

FINRA Rule 5210

FINRA Rule 5210 - Publication of Transactions and Quotations prevents publication or circulation (advertisement, print, communication, etc.) of quotes for securities by the dealer-brokers until they are bonafide sales and purchase prices or are actual bids or ask quotes for the securities. This rule aims to weed out:

  • Manipulative and deceptive quotations: If the quotations are not actual, then the dealers may increase the ask and decrease the bid to increase profit. This leads to false volatility in the securities, which is detrimental to both the firm as well as the investor.
  • Self-trade: Buying and selling of security without a change in beneficial ownership is known as self-trade. This might provide a false sense of liquidity which can be detrimental.
  • Disruptive quoting and trading activity: Entering orders with different quotes, orders on both buy and sell-side, etc. are not bonafide orders that reflect the supply and demand of the security. This leads to incorrect valuation and is therefore prohibited.

FINRA Rule 5220

FINRA Rule 5220 - Offers and Stated Prices requires dealer-brokers or market makers to honor the quotes that they have published. It prevents market makers or dealers from publishing quotes unless and until they are prepared to buy and sell at those prices. This refers to the firmness of the quotation and hence prohibits backing away. Backing away is not honoring the quotes published or transmitted in any way.

FINRA Rule 5260

FINRA Rule 5260 - Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts prevents transaction into or publishing a quote for a security that has been kept under a trading halt. Trading halt is the suspension of trading into security for a number of reasons such as news announcements, regulatory reasons, technical glitch, etc. The trading halt can either be applied to a single exchange or to all exchanges on which the security trades. The trading halt in security is effected under Rule 6120(a)(3).

In addition to this, if security is under a trading halt, then:

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