July 24, 2014
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NASD Proposes Amendment to 3 Quote Rule

The National Association of Securities Dealers, Inc. (NASD) has proposed amendments to Rule 2320(g), also known as the "Three Quote Rule" and Rule 3110(b)(2). The changes, if approved, will include the following:
  • Market Makers will no longer need to note the identity of the broker/dealers, and their quotations, on the order ticket when two or more firm quotations are displayed on an inter-dealer quotation system which makes available its quotation data to NASD RegulationSM;
  • Market Makers that are executing a customer order in a non-Nasdaq security will be required to contact and obtain three quotations only when there are fewer than two firm quotations displayed in a real-time inter-dealer quotation system, such as the OTC Bulletin Board (OTCBB) or electronic pink sheets; and
  • Market Makers that display priced quotations in two or more real time quotation media for the same security, will be required to display the same prices on each quotation medium. This, in turn, will enhance the ability of market participants to determine the best inter-dealer market of a particular security
The Three Quote Rule was originally adopted on May 2, 1988, as an amendment to the NASD's best execution interpretation. It requires market participants that execute transactions in non-Nasdaq securities on behalf of customers to contact a minimum of three dealers (or all dealers if there are three or fewer), and to obtain quotations in determining the best inter-dealer market. The purpose of the Three Quote Rule was to create a standard to help ensure that Market Makers would fulfill their best execution responsibilities to customers in non-Nasdaq securities. This applies particularly to transactions involving securities of relatively low liquidity with non-transparent prices.

Since the adoption of the Three Quote Rule, the market for non-Nasdaq securities has changed dramatically. Given the rapid growth in the market for OTCBB securities, compliance with the current Three Quote Rule often can result in delays in obtaining executions of customer orders. NASD Regulation believes that the two transparent, firm quotes have a significantly higher informational value than three telephone quotes, in terms of obtaining the best execution for customers.

Compliance with the Three Quote Rule, though, is only a minimal standard and does not mean the Market Maker has met its best execution obligations. Best execution requires market participants to use reasonable diligence to determine the best inter-dealer market for a security. Additionally, participants should buy or sell in that market so that the resulting price to the customer is as favorable as possible given market conditions.

 

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