Understanding The NASDAQ Market
Equity Trader Examination
In addition to the requirements to become a market maker, firms must follow strict guide-lines when acting as a market maker. Market makers must adhere to all rules relating to their participation in the over the counter market. Entering quotes, executing orders, and operating as a market maker during an offering are just some of the activities that have very specific standards of operation. All Series 57 candidates must have an in-depth understanding of market maker rules and regulations in order to successfully complete the Series 57 exam.
Times For Entering a Quote
The NASDAQ opens for trading at 9:30 AM EST with an opening cross. Market makers in anticipation of the opening may enter bids and offers based on orders that the firm has received from customers or for the firm’s account beginning at 7:00 AM. Quotes and limit X orders that do not lock or cross the market become part of the “book”. If a market maker enters a quote or order that locks or crosses the market, the order or quote is sent to the “queue” to wait for execution. Quotes and orders that are placed in the queue are executed against the best bid or offer available at that time. Orders that cannot be executed in the queue are sent back to the book.
The Opening Cross
The Opening cross begins at 9:28 AM. At this time the NASDAQ Market Center Execution System automatically executes orders. Orders placed after 9:28 AM may not be cancelled. Orders placed after 9:28 AM may only be changed if the change to the order makes the order more aggressive. A change that increases the size of the order or improves the price would make the order more aggressive. For a buy order an improved price would be a higher limit price, for a sell order an improved price would be a lower limit price. All orders that are executed during the opening cross will be reported to ACT / TRF with a .T modifier. The official NASDAQ opening print is disseminated by the system at “9:30 X”.
Orders that are entered prior to the opening for regular hours execution may not be cancelled or modified during the opening cross.
Often during the opening cross as a result of news or other events, there are either buy side or sell side order imbalances for any given security. During the opening cross starting at 9:28 AM order imbalance messages will appear in the NASDAQ net order imbalance indicator (NOII) system. Between 9:28 AM and 9:29 AM indications of the imbalance are sent out every 15 seconds. After 9:29 until the open imbalance messages are sent every 5 seconds. Among other information, order imbalance indications include the direction and size of the imbalance, the percent away from the current inside market and the indicative price. The indicative price is the price at which the opening cross would take place if executed at the time the imbalance indication was disseminated.
The NASDAQ Official Opening Price / NOOP
NASDAQ opens for regular hours trading at 9:30 AM EST. At that time the orders that are held in the queue which have not been paired off are executed and reported to the tape. The first trade that is reported to the tape creates the NASDAQ Official Opening Price (NOOP). If at 9:30:15 no trades in the queue have been matched and reported to the tape, the first, last sale trade that is reportable to the tape becomes the NOOP. NASDAQ has created new types of orders as a result of the creation of the opening cross. The orders are:
- Early regular hours, orders entered prior to 9:28 AM for the regular trading session
- Late regular hours, orders entered after 9:28 AM for the regular trading session
- OO On Open, market and limit orders that are entered to be executed at the opening price only
- IO, Imbalance Only, orders that are only to be executed against imbalances on the open that are away from the bid or offer at 9:30 AM
- X- Extended hours orders are entered before or after the market opens and can be day, GTC or IOC
The Closing Cross
NASDAQ has developed the closing cross to determine a uniform closing price for securities at the end of the trading day. Customers and firms may enter on the close orders at any point starting at 7:00 AM up until 3:50 PM. After 3:50 PM, on the close orders may not be entered, cancelled or modified. On the close orders that may be entered include both market and limit on close orders. Starting at 7:00 AM and up until the close of the market, firms may enter imbalance only orders. Imbalance only orders must be priced and will not be executed prior to the close nor will they be included in the market maker’s displayed quote prior to the close.
The NASDAQ crossing network provides intra day and post closing executions. All crosses will be executed anonymously and will provide greater liquidity. The scheduled crossing times are 10:45 AM, 12:45 PM, 2:45 PM and 4:30 PM. Orders may be entered for the next cross only, for regular hours crosses or for all subsequent crosses. Orders entered for all crosses will not be eligible for the opening or closing cross.
The NASDAQ Halt Cross
If a security is halted as a result of news or other corporate developments the security will reopen with an opening cross. The NASDAQ halt cross is designed to provide greater price discovery and allow all market participants and investors an opportunity to execute orders at the best available price once the news has been disseminated. The net order imbalance indicator (NOII) will disseminate order imbalance information every 5 seconds between the time quoting begins and the time trading resumes.
There are two ways that a market maker may withdraw their quotes for a security. A market maker may withdraw their quotes on either a voluntary basis or on an excused basis. If a market maker withdraws their quotes on a voluntary basis they simply remove or “pull” their quote. A market maker who voluntarily withdraws their quote may not re-register as a market maker in that security for 20 business days. If a market maker removes their quote for any of the following reasons it would be considered a voluntary withdraw:
- A sudden influx of orders
- Trading losses
- Lack of interest
A market maker may also withdraw their quotes on an excused basis by applying to the NASDAQ for permission to withdraw their quotes. A market maker may request an excused withdrawal under the following circumstances:
- The firm has 3 or fewer NASDAQ level III workstations and key personnel are going on vacation. The application must be made 1 business day prior to removing the quotes.
- A firm may be granted an excused withdrawal for up to 5 business days for circumstances beyond the market maker’s control such as illness or acts of God.
- The market maker is participating in a distribution or is acting as a passive market maker.
- The firm may be granted an excused withdrawal for up to 60 days for legal or regulatory reasons, i.e., the firm has inside information regarding the issuer of the security as a result of an investment banking relationship.
- The firm involuntarily fails to maintain a clearing relationship.
- An excused withdrawal may be granted for religious holidays provided that the application to NASDAQ is made 1 business day prior to the withdrawal.
Accidental Withdrawal of Quotes
If a market maker is attempting to withdraw its quote for a given security and inadvertently types in the wrong symbol, resulting in the market maker’s quote being withdrawn from the wrong security; the market maker may immediately have its quote reinstated by NASDAQ. NASDAQ will reinstate the market maker’s quote so long as the market maker contacts NASDAQ within one hour and it is apparent that the removal of the quote was accidental in nature. Additionally NASDAQ will look at the market maker’s accidental withdrawals over the course of the year. NASDAQ considers 2-6 accidental withdrawals acceptable depending on the number of securities the firm makes markets in.