3.3 Quoting

Securities Industry Essentials SIE

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1 Introduction

About the SIE Exam How to Use This Course

2 Chapter 1: Knowledge of Capital Markets

1.1 Regulatory Bodies 1.2 State Regulation 1.3 Market Participants 1.4 Types of Markets 1.5 The Exchanges 1.6 OTC Markets 1.7 Economic Policies 1.8 Interest Rates 1.9 Business Cycles 1.10 International Economics

3 Chapter 2: Understanding Products and Their Risks

2.1 Common Stock Basics 2.2 Corporate Actions 2.3 Preferred Stock 2.4 ADRs 2.5 Bond Basics 2.6 Yields 2.7 U.S. Treasury Securities 2.8 Corporate Bonds 2.9 Municipal Bonds 2.10 Money Market Instruments 2.11 Options Basics 2.12 Hedging Strategies 2.13 Mutual Funds 101 2.14 Mutual Fund Fees 2.15 ETFs 2.16 UITs & REITs 2.17 DPPs 2.18 Systematic Risk 2.19 Non-Systematic Risk 2.20 Mitigation Strategies

4 Chapter 3: Trading, Customer Accounts and Prohibited Activities

3.1 Order Types 3.2 Trade Settlement 3.3 Quoting 3.4 Account Types 3.5 Account Registration 3.6 Retirement Plans 3.7 Education Savings 3.8 AML Rules 3.9 Market Manipulation 3.10 Insider Trading 3.11 Customer Protection

5 Chapter 4: Overview of Regulatory Framework

4.1 Registration 4.2 Continuing Education 4.3 Employee Conduct 4.4 Correspondence

Key Takeaways Explain This Topic AI

The bid price is what market makers pay when buying from customers (lower price), while the ask price is what customers pay when buying from market makers (higher price)

The bid-ask spread represents the market maker's profit margin - narrow spreads indicate high liquidity and efficient markets

The NYSE is an auction market with a single Designated Market Maker (DMM) per stock, while Nasdaq is a dealer market with multiple competing market makers

The National Best Bid and Offer (NBBO) shows the highest available bid price and lowest available ask price across all market centers

Market makers must honor their firm quotes and cannot back away from quoted prices and sizes
Last updated: January 2026

Securities Quoting

Understanding how securities are quoted and priced is fundamental to trading. This section covers bid-ask spreads, market maker roles, and the differences between auction and dealer markets.

Bid and Ask Prices

Every quoted security has two prices:

The Bid Price
The price at which a market maker will buy from you
The price you receive when selling
Always the lower of the two prices
The Ask (Offer) Price
The price at which a market maker will sell to you
The price you pay when buying
Always the higher of the two prices

Memory Tip: "Bid means buy" - the market maker is bidding to buy from customers at this price.

Quote Example

Price
Bid $49.95
Ask $50.05
Spread $0.10

If you want to:

Buy : You pay the ask ($50.05)
Sell : You receive the bid ($49.95)
The Bid-Ask Spread

The spread is the difference between the ask and bid prices.

Spread = Ask - Bid

Bid Ask Spread
$49.95 $50.05 $0.10
$25.00 $25.50 $0.50
$100.00 $100.02 $0.02

What Affects Spread Width?

Factor Narrow Spread Wide Spread
Liquidity High volume trading Low volume trading
Volatility Stable prices Volatile prices
Competition Many market makers Few market makers
Stock Price Often narrower in % terms Can be wider

Key Point: A tight (narrow) spread indicates high liquidity and an efficient market. A wide spread indicates lower liquidity and higher trading costs.

Market Makers

Market makers are dealers who stand ready to buy and sell securities, providing liquidity to the market.

Market Maker Obligations
Display bid and ask quotes during market hours
Trade at their quoted prices
Maintain orderly markets
Provide two-sided quotes (both bid and ask)
How Market Makers Profit

Market makers earn money through the spread :

Buy from customer at bid ($49.95)
Sell to another customer at ask ($50.05)
Profit = $0.10 per share

Note: With high volume, even small spreads generate substantial profits.

Auction Market vs. Dealer Market

Securities trade in two main types of markets:

Auction Market (NYSE)

Feature Description
Structure Centralized exchange with single location
Price Discovery Buyers and sellers compete openly
Key Player Designated Market Maker (DMM)
Matching Orders matched directly when possible
Quote Source Consolidated from all orders

The NYSE is an auction market where:

Buyers compete to buy at the lowest price
Sellers compete to sell at the highest price
The DMM facilitates trading and maintains order
Dealer Market (Nasdaq)

Feature Description
Structure Decentralized, electronic network
Price Discovery Multiple dealers compete for business
Key Player Multiple competing market makers
Matching Trades through dealers
Quote Source Each market maker posts quotes

Nasdaq is a dealer (negotiated) market where:

Multiple market makers compete
Each posts their own bid-ask quotes
Best prices displayed through the system
Comparison

Auction (NYSE) Dealer (Nasdaq)
Location Physical exchange Electronic network
Market Makers One DMM per stock Multiple per stock
Competition Buyers vs. sellers Dealers vs. dealers
Example New York Stock Exchange Nasdaq Stock Market
Inside Market (NBBO)

The National Best Bid and Offer (NBBO) represents the best available prices across all market centers.

Inside Market Defined

Term Meaning
Inside Bid Highest bid price available
Inside Ask Lowest ask price available
Inside Spread Difference between inside bid and ask
Example: Multiple Market Makers

Market Maker Bid Ask
MM1 $50.00 $50.08
MM2 $50.02 $50.06
MM3 $49.98 $50.10

NBBO:

Inside Bid: $50.02 (highest)
Inside Ask: $50.06 (lowest)
Inside Spread: $0.04

Best Execution: Brokers must seek the best available prices for customer orders, generally at or better than the NBBO.

Quote Size

Quotes also include the number of shares available at each price:

Reading a Quote with Size
Quote: 50.02 x 50.06 (5 x 3)

Component Meaning
50.02 Bid price
50.06 Ask price
5 500 shares available at bid
3 300 shares available at ask

Note: Size is typically shown in round lots (multiply by 100).

Firm vs. Subject Quotes

Quote Type Meaning
Firm Quote Market maker must honor the price and size
Subject Quote Indicates interest but not binding
Nominal Quote For information only, not tradeable

Regulation: Market makers must generally honor their firm quotes. Backing away from a firm quote is a violation.

Key Takeaways
Bid = dealer buys / you sell (lower price)
Ask = dealer sells / you buy (higher price)
Spread = dealer's profit margin
Narrow spreads indicate liquid, efficient markets
NYSE is an auction market; Nasdaq is a dealer market
NBBO shows the best available prices
Market makers must honor firm quotes