Market Making and Proprietary Trading
Two-sided quotes and the cost of being wrong
A registered market maker in NMS stocks owes continuous, two-sided quotations during regular market hours, at prices and sizes that are reasonably related to the market. The firm quote concept is the exam favorite: a displayed quotation is firm for its displayed size, so an incoming order at or through your quote must be executed at your quoted price or better, up to the lesser of the order size and your displayed size. The remainder is free to be handled elsewhere. Odd lots and quotations that are not displayed do not carry the same obligation. Market makers also face limit order protection: customer limit orders must be executed before the firm trades its own account at the same or better price, subject to recognized exceptions such as intermarket sweep orders and immediate-or-cancel treatment.
Proprietary trading shifts the focus to risk controls. Under the market access rule, firms with direct electronic access must apply pre-trade financial and regulatory risk controls - price collars, maximum order size, duplicate order checks, and credit or capital thresholds that block an order before it reaches the market - and must regularly review whether those controls remain effective. Supervisory systems must catch unauthorized trading, and prop accounts must be segregated from customer order flow so that no proprietary trade trades ahead of a customer order.
Traps: treating a quote as firm beyond its displayed size, forgetting that a market maker may still decline an order after filling the displayed amount, and assuming risk controls are satisfied by post-trade surveillance alone.
Worked example: your quote shows 500 bid at 25.10 / 800 offered at 25.12. A customer order to buy 1,000 arrives. Execute 500 at 25.12 (or better); the remaining 500 is not protected by your quote.