Securities Trader Representative (Series 57) Practice Exam

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If MM#1's bid as a passive market maker is the last remaining at the inside bid, what must MM#1 do if two independent market makers lower their bids?

Must immediately lower its bid to match the highest independent bid
Must withdraw its Nasdaq quote
Not required to change its bid until certain conditions are met
Must lower its bid to avoid regulatory issues

The correct answer is: Not required to change its bid until certain conditions are met

The correct answer emphasizes the obligations of a passive market maker, particularly in circumstances where their bid is the last one remaining at the inside market. In this scenario, if two independent market makers decrease their bids, MM#1 is not immediately required to adjust its bid in response to these changes. Instead, there are specific guidelines and conditions that govern when a passive market maker must act, and they have the discretion to maintain their existing bid until certain regulatory thresholds or conditions are met. This reflects the nature of market-making, where passive actors may choose not to react to every shift in the bid-ask spread, especially if they believe that their current pricing still reflects market realities or complies with regulatory requirements. The stability of their bid can create opportunities for the market, allowing active participants to adjust their strategies while the passive market maker fulfills its role without unnecessary fluctuations. The other options suggest immediate actions that are not aligned with the true market-making role of MM#1 and the guidelines governing passive market makers. For instance, withdrawing a quote or lowering a bid without the appropriate triggering conditions would not be necessary and could hinder market efficiency.