Order Handling, Quotations, Market Making, and Short Sales
Protecting orders and the integrity of quotes
Best execution (Rule 5310) is not simply best price: weigh execution likelihood, speed, size, and total cost, and review execution quality regularly and rigorously. Rule 5320 (the 'Manning' rule) bars a firm from trading ahead of a customer limit order at a price at or better than the customer's, subject to narrow exceptions. Rule 5270 bars front-running customer block orders. Quotation rules require a market maker to maintain continuous two-sided quotes during trading hours, honor firm quotes up to normal size, and avoid locking or crossing markets. Trades in NMS stocks must be reported to the TRF as soon as practicable and within 10 seconds of execution, with accurate capacity, price, and volume.
Short sales: Reg SHO Rule 200 requires a locate or borrow before a short sale, but bona fide market makers are excepted from the locate requirement - a favorite trap. Rule 203 requires correct 'short' marking. Rule 201, the alternative uptick rule, is triggered when a covered security declines 10% or more from the prior close; the restriction (short sales only above the current national best bid) lasts the remainder of that day and the following day. Rule 204 imposes close-out obligations for fails to deliver, with a longer window for bona fide market making in threshold securities.
Rule of thumb: every short sale needs a locate, a correct mark, and a close-out plan; every customer limit order must be protected until executed, cancelled, or expired. Worked example: a stock closed at 50.00 and trades at 44.90. The 10% decline is met, so for the rest of the day and the next day a short sale may only be executed at a price above the current national best bid.