A Firm Quote is a term used in the securities industry to refer to a bid or offer price for a security that is stated by a market maker and is not subject to further negotiation or review unless specified otherwise. It contrasts with nominal or subject quotes, which are tentative.
Key Characteristics of a Firm Quote
Firm Quotes are critical components of financial markets due to their definitive nature. Here are the essential elements:
- Round-Lot: A firm quote typically pertains to a round lot, which is the standard trading unit for a particular stock, generally 100 shares.
- Definitive Nature: Unlike a nominal or subject quote, a firm quote does not invite further negotiation—a transaction can be executed immediately at the quoted price.
- Market Maker’s Stated Price: Firm quotes are provided by market makers, who facilitate liquidity in the market by being ready to buy or sell at publicly quoted prices.
Types of Quotes in Securities Trading
Understanding the various types of quotes can provide a clearer picture of how firm quotes fit within the broader context of securities trading.
Firm Quotes
- Binding: These quotes are binding on the market maker for the quantity and the price specified.
- Immediate Execution: Transactions can occur instantly at the firm quoted price.
Nominal Quotes
- Indicative Only: These quotes indicate a potential price but are not binding.
- Subject to Change: Nominal quotes suggest pricing trends but require confirmation and further negotiation.
Subject Quotes
- Condition-Dependent: Subject quotes depend on certain conditions being met or further review.
- Tentative: They imply that the price is subject to change pending more information or confirmation.
Examples of Firm Quotes
- Equity Market Example: A market maker quotes a bid price of $50 for a round lot (100 shares) of XYZ stock. This is a firm quote, meaning if you wish to sell 100 shares, you can do so at $50 immediately.
- Bond Market Example: A dealer quotes a firm offer for a municipal bond at 102.5 for a round lot of $100,000 in face value. This indicates the dealer is willing to sell at that price without further negotiation.
Historical Context of Firm Quotes
The concept of firm quotes has evolved alongside the development of securities markets. Initially, all quotes required negotiation, but advancements in market technology and trading practices have led to the establishment of firm quotes to enhance market liquidity and efficiency.
Applicability in Modern Markets
Today, firm quotes play a vital role in electronic trading platforms and exchanges by providing transparency and ensuring that traders can transact at known prices without ambiguity.
Comparison with Related Terms
- Market Order: An order to buy or sell a security immediately at the best available current price.
- Limit Order: An order to buy or sell a security at a specific price or better.
FAQs
What happens if a market maker can't honor a firm quote?
Why are firm quotes important?
References
- Investopedia: Firm Quote - Investopedia
- SEC Glossary - SEC Official Site
Summary
A Firm Quote signifies a definitive bid or offer price quoted by a market maker for a round lot of a security, ensuring immediate execution without the need for further negotiation. It stands in contrast to nominal and subject quotes, which are more tentative and require further review. Firm quotes are critical for market efficiency, providing clarity and reliability to traders.
