Securities Trader Representative (Series 57) Practice Exam

What is the obligation of MM#1 when MM#2 proposes to buy 700 shares at 31.55?

1. Refuse to execute since it exceeds MM#1's quote size

2. Execute at least 500 shares but no further obligation

3. If the entire order is executed, it must move its offer up

4. If the entire order is executed, it need not move its quote

The correct answer is: If the entire order is executed, it need not move its quote

In the context of market making, when one market maker (MM#2) proposes to buy shares at a specific price, MM#1 has certain obligations and rights regarding the execution of that order. In this case, if MM#1 receives a proposal to buy 700 shares at $31.55, the correct understanding lies in how market makers handle their quotes in relation to trades executed against them. The correct choice indicates that even if MM#1 executes the entire order from MM#2, it does not have to adjust its quote upward. This is grounded in the principle that market makers are not required to change their quotes in response to the execution of a trade, provided they can still accommodate more trades at the same price and size. Market makers quote prices and provide liquidity, and once they execute a trade, they can choose to maintain their existing quotes unless the market conditions or their inventory levels dictate otherwise. In simple terms, executing the order does not automatically trigger a requirement for MM#1 to increase or revise their quoted price. This means MM#1 can still quote the same bid and ask prices after the transaction, allowing for flexibility in their market-making activities.