SIE PREP | FINANCIAL REGULATION COURSES
A quote is a statement of the current prices at which a security can be bought or sold — specifically, the bid price at which a market maker or dealer is willing to purchase the security and the ask price — also called the offer — at which the market maker or dealer is willing to sell it.
Every quote contains two prices, two sizes indicating the number of shares or units available at each price, and an implicit spread — the difference between the bid and the ask — which represents the market maker's compensation for providing immediate liquidity.
Understanding quotes, the bid-ask spread, and the national best bid and offer is foundational to understanding how securities markets function and is directly tested on the SIE and Series 7 examinations.
The Bid and the Ask
The bid is the highest price a buyer in the market is currently willing to pay for the security. From the market maker's perspective, it is the price at which the market maker will buy shares from a seller. An investor who wants to sell immediately receives the bid price.
The ask — also called the offer — is the lowest price a seller is currently willing to accept. From the market maker's perspective, it is the price at which the market maker will sell shares to a buyer. An investor who wants to buy immediately pays the ask price.
The bid is always lower than the ask. An investor who buys at the ask and immediately sells at the bid suffers an immediate loss equal to the spread — the round-trip transaction cost of entering and exiting the position without any price movement. This spread is simultaneously the market maker's source of profit and the investor's cost of immediacy.
A market maker quoting ABC stock at forty dollars bid and forty dollars and fifty cents ask is willing to buy up to the quoted size at forty dollars and sell up to the quoted size at forty dollars and fifty cents. The fifty-cent spread represents the market maker's gross revenue on a round-trip transaction in that security.
Quote Size
Every quote includes a size — the number of shares the market maker is willing to transact at the stated price. Under Regulation NMS Rule 602, the Firm Quote Rule, market makers are obligated to execute transactions at their quoted prices up to the quoted size for any order that arrives. A market maker that quotes one thousand shares at forty dollars must buy one thousand shares at forty dollars from any seller presenting a market sell order of one thousand shares or fewer. The firm quote obligation ensures that displayed prices are genuine commitments rather than indicative prices that market makers can withdraw when convenient.
Quote sizes are displayed in round lots — one round lot equals one hundred shares for most equity securities. A quoted size of five on the bid side means the market maker will buy five round lots — five hundred shares — at the bid price.
The National Best Bid and Offer
The National Best Bid and Offer — universally abbreviated NBBO — is the consolidated quotation across all national securities exchanges and trading venues that represents the highest available bid and the lowest available ask for a specific security at any moment during the trading day. It is computed and disseminated continuously by Securities Information Processors — SIPs — under the authority of Regulation NMS and the national market system plan requirements of the Securities Exchange Act of 1934.
The two SIPs operating in the United States equity market are the Consolidated Tape Association, which processes data for NYSE-listed securities, and the Unlisted Trading Privileges plan, which processes data for Nasdaq-listed securities. Both SIPs aggregate quotes from all registered exchanges — currently sixteen national securities exchanges — and FINRA's Alternative Display Facility, producing the consolidated NBBO that is disseminated to brokers, market data vendors, and investors.
Regulation NMS Rule 603 requires the SIPs to make the NBBO available to all market participants on equal terms. Regulation NMS Rule 611 — the Order Protection Rule — requires all trading centres to establish and enforce policies preventing trade-throughs, meaning no execution can occur at a price inferior to the NBBO. A broker-dealer routing a customer's buy order must not execute that order at a price above the national best ask. Regulation NMS Rule 612 — the Sub-Penny Rule — establishes that quotes and orders for NMS stocks priced at one dollar or above must be expressed in minimum increments of one cent, preventing market makers from gaining queue priority through fractional-cent bid improvements.
Quote-Driven Versus Order-Driven Markets
The role of the quote varies depending on the market structure in which a security trades.
In a quote-driven market — also called a dealer market — prices are set by market makers posting continuous two-sided quotes from their own inventory. The OTC market and the historical NASDAQ dealer market operate on a quote-driven basis. Investors transact at the prices posted by dealers rather than matching directly with other investors.
In an order-driven market — also called an auction market — prices emerge from the matching of investor buy and sell orders in a centralised order book, without the intermediation of a dealer posting independent quotes. The NYSE's auction structure is order-driven at its core, though Designated Market Makers contribute supplementary quotes that support price continuity. Modern United States equity markets are hybrid structures combining both elements.
Firm Versus Indicative Quotes
A firm quote is a binding commitment to trade at the stated price up to the stated size. Under Regulation NMS Rule 602, all quotes displayed in the consolidated quotation system are firm and must be honoured. A broker-dealer that fails to honour a firm quote is subject to FINRA disciplinary action.
An indicative quote — also called a subject quote or a nominal quote — is a non-binding price indication provided for informational purposes only, subject to confirmation before any transaction is executed. Indicative quotes are used in less liquid over-the-counter markets — particularly in the bond market and the OTC derivatives market — where the specific transaction terms require negotiation and the market maker is not committing to execute at the stated level.
Bond quotations follow specific conventions governed by MSRB Rule G-15 for municipal bonds and FINRA Rule 2232 for corporate bonds. Municipal bonds are often quoted on a yield basis — the dealer states the yield to maturity or yield to call at which they will transact — with the corresponding dollar price implied by that yield. FINRA Rule 2232 requires broker-dealers to disclose the dollar price to customers on confirmations whenever a bond is quoted on a yield basis, ensuring that retail investors understand the actual price they are paying regardless of how the transaction was negotiated.
Examination Relevance and Key Takeaways
A quote is tested on the SIE and Series 7 examinations in the context of market structure, the bid-ask spread, the NBBO, market maker obligations, and the distinction between firm and indicative quotes.
The key points to retain are these.
A quote consists of a bid — the price at which the market maker will buy — and an ask or offer — the price at which the market maker will sell — along with a size indicating the number of shares available at each price. The bid is always lower than the ask. The difference between the two is the spread — the market maker's compensation for providing liquidity and the investor's cost of immediacy. The NBBO is the highest bid and lowest ask across all national securities exchanges and trading venues, computed continuously by Securities Information Processors under Regulation NMS and disseminated under Rule 603. Regulation NMS Rule 611 prohibits trade-throughs — executions at prices inferior to the NBBO. Regulation NMS Rule 612 requires minimum one-cent price increments for NMS stocks priced at one dollar or above. All quotes displayed in the consolidated quotation system are firm under Regulation NMS Rule 602 — the Firm Quote Rule — meaning market makers must honour them up to the quoted size. Indicative or subject quotes are non-binding price indications used in less liquid markets requiring negotiation before execution. Bond quotations governed by MSRB Rule G-15 and FINRA Rule 2232 may be stated on a yield basis with dollar price required on customer confirmations.
