What is the Quote Rule?

The quote rule is a rule which regulates activities by broker-dealers in markets overseen by the Securities and Exchange Commission (SEC) in the United States. Under the terms of the quote rule, certain broker dealers must publicly display their most competitive quotes for all listed securities which they deal in so that quote information is available. The purpose of this rule is to promote transparency by making sure that investors have access to as much information as possible before making buying and selling decisions. Prior to the introduction of the quote rule some traders offered more favorable trades on private systems only accessible to some investors, and this was deemed unfair.

This rule was enacted in 1997. It applies to broker-dealers who act as market makers or specialists. Market makers are firms which are continuously capable of buying and selling securities at quoted prices. Specialists, who work for specialist firms, are involved in the active management of stock trading and have certain responsibilities which they must fulfill. Both market makers and specialists are also required to abide by a number of other SEC rules.

The quotation information must include the highest price at which the person making the quote is willing to buy, along with the lowest price at which the person will sell. This information must be kept current and accurately updated under the terms of the quote rule. If it is not, there may be penalties. Likewise, if a broker-dealer fails to provide quotes at all and she or he is obligated to under SEC rules, there can also be penalties.

Broker-dealers may still trade on private and proprietary systems which are limited to people who belong to those systems. However, if they do, their most favorable quotes will still be made public under the quote rule. This gives people access to as much information as possible so that they can make informed choices. Transparency as a whole with regulations such as the quote rule is believed to be good for stock markets and security exchanges because it allows people to make prudent decisions.

Financial markets can move very quickly, and sometimes experience extreme volatility. It is important for people to make sure that quoted rate information is current and accurate before making a move, whether they are buying or selling. Acting on old information can result in making a bad deal or lagging behind the moves the market makes and thus missing opportunities.