Market Structure and Trading Flashcards

What is the role of a market maker?

Answer: To provide liquidity by continuously quoting bid and ask prices

Market makers provide liquidity by posting continuous bid (buy) and ask (sell) prices, profiting from the bid-ask spread.

The bid price in a security quote represents:

Answer: The price at which a dealer will buy the security

The bid price is the highest price a buyer (dealer) is willing to pay to purchase the security from an investor.

The National Best Bid and Offer (NBBO) rule requires broker-dealers to:

Answer: Execute customer orders at the best available prices across all exchanges

The NBBO rule requires broker-dealers to execute customer orders at the best available bid or offer price across all trading venues.

A limit order is an instruction to buy or sell a security:

Answer: At a specific price or better

A limit order specifies the maximum price a buyer will pay (or minimum price a seller will accept) and will only execute at that price or better.

What is the difference between a broker and a dealer?

Answer: Brokers act as agents for customers; dealers trade for their own account as principals

A broker acts as an agent executing trades on behalf of customers, while a dealer trades as a principal from its own inventory.

Regular-way settlement for most equity securities occurs:

Answer: 1 business day after the trade (T+1)

Following the SEC's 2024 transition to T+1 settlement, most equity securities must settle one business day after the trade date.