Quotes and Bid-Ask Practice Questions for the SIE

Answer: Highest price a buyer, such as a market maker, is willing to pay — the price a customer receives when selling at the market

The bid is the highest price a buyer — typically a dealer or market maker — stands ready to pay, so a customer who sells at the market receives the bid. The ask (or offer) is the lowest price a seller will accept, and it is what a customer pays when buying. A helpful anchor: the quote belongs to the dealer, who buys low (bid) and sells high (ask), so the customer transacts on the opposite side — sell at the bid, buy at the ask. Options B and D describe the ask side, and option C reverses which side the customer trades on — the most common error tested with quotes.

The Trap: direction-flip

• Price a customer pays when entering a market order to buy: Direction flip: customers buy at the ask, not the bid; students commonly assume they buy at the lower quoted price.
• Lowest price at which a seller is willing to sell the security: Direction flip: this defines the ask/offer, not the bid — the single most-missed distinction in this topic.
• Price at which the dealer is willing to sell shares out of its own inventory: Dealer-perspective flip: the dealer sells from inventory at the ask; the bid is where the dealer buys.

Verified against: customers sell at bid)

Answer: $31.05, the ask price

A market order to buy executes against the best available offer — here the $31.05 ask. The $31.00 bid is the price customers receive when selling, not buying. The last reported sale is history; orders execute against the current quote, not the tape. And a dealer is not required to pass shares along at its own cost — the spread between the bid it pays and the ask it charges is the dealer's compensation for making a market, a principal capacity that must be disclosed on the trade confirmation under SEC Rule 10b-10.

The Trap: direction-flip

• $31.00, the bid price: Direction flip: the bid is where customers sell; buyers must pay the offer side.
• $31.00, because a dealer must sell to customers at the same price it pays for stock: Dealer-perspective confusion: the dealer buys at the bid and sells at the ask; the spread is its compensation, not an overcharge it must waive.
• The last reported sale price, whatever it was: Market-order misconception: a market order does not lock in the last sale or any quoted price; it executes against the current best available quote.

Verified against: Standard bid-ask/market order execution mechanics (buy orders execute at the ask); capacity disclosure required under SEC Rule 10b-10

Answer: 45.10 – 45.12

The spread is the difference between the ask and the bid, and it functions as an implicit transaction cost: the narrower the spread, the more liquid and actively traded the security generally is. Choice C's $0.02 spread is the mark of a deep, competitive market with many buyers and sellers — in heavily traded stocks the displayed quote often sits at the one-cent minimum. C is the clear answer because it is narrowest on both ways of sizing a spread: smallest in dollars ($0.02) and smallest relative to price (about 0.04% of $45). Those two measures can disagree, and when they do, the percentage is the better read on what trading actually costs you. Notice that B has the largest dollar spread ($0.75), yet at roughly 2.5% of a $30 price it is relatively tighter than D's $0.45 on an $8 stock (about 5.6%). Biggest dollar spread does not automatically mean costliest market. Watch the inverted trap: a wide spread is not a "better deal" — it is a higher cost of trading, because a round trip means buying at the ask and selling back at the bid, and the spread is what you forfeit in between.

The Trap: wide-spread-better

• 12.00 – 12.60: Wide-spread inversion: a $0.60 spread — about 5% of a $12 price — signals a thin, illiquid market. Students who believe a wide spread means a better opportunity pick wide quotes.
• 8.00 – 8.45: Wide-spread inversion: $0.45 on an $8 stock is roughly a 5.6% relative spread — the widest of any choice in percentage terms and a hallmark of thin trading — even though it is not the biggest dollar spread shown.
• 30.00 – 30.75: Wide-spread inversion: $0.75 is the largest spread in dollar terms, but that alone is not what makes it wrong — as a percentage of price it is only about 2.5%, actually tighter in relative terms than A or D. Either way it is dramatically wider than C's $0.02 and points to a thinner market, not the most active one.

Verified against: General bid-ask spread/liquidity concept — no single regulatory citation

Answer: Continuously publishes both a bid and an offer and stands ready to trade the security for its own account as principal

A market maker commits capital to a security by continuously quoting both a bid (where it will buy) and an offer (where it will sell), trading from its own inventory as a principal — its profit comes from the spread, via markups and markdowns, not commissions. Acting as agent and charging a commission describes a broker, the other side of the broker-dealer distinction; a firm acts in one capacity per trade and that capacity must be disclosed on the confirmation under SEC Rule 10b-10. "Inventory plus commission" mixes the two vocabularies, and quoting only one side contradicts the two-sided obligation that defines market making.

The Trap: market-maker-as-agent

• Matches customer buy and sell orders as an agent and earns a commission on each trade: Principal/agency confusion: matching orders for a commission describes a broker acting as agent; market makers trade as principal.
• Publishes a quote on only the side of the market it currently wishes to trade: One-sided-quote misconception: market makers must stand ready with continuous two-sided quotes — both a bid and an offer.
• Buys and sells the security from its own inventory and charges customers a commission on each trade: Mixed-vocabulary distractor: trading from inventory (principal) earns a markup or markdown — a commission belongs to agency trades, and a firm cannot charge both on one transaction.

Verified against: Securities Exchange Act of 1934 §3(a)(38) — statutory definition of 'market maker' (dealer holding out continuous two-sided bid/ask, trading as principal)

Answer: $9,100

The two-sided quote belongs to the market: $18.20 is the bid — the highest price a buyer will pay — and $18.30 is the ask, the lowest price a seller will accept. A customer selling at the market meets the standing buyer, so the sale happens at the bid: 500 × $18.20 = $9,100. Using the $18.30 ask reverses the sides; that is where customers buy. The $0.10 spread is not deducted again as a separate charge — the seller already bears it implicitly by receiving the bid instead of the ask, which is why a wide spread makes a round trip costly. Nor is the midpoint the expected fill: a market order takes the best price on the customer's side of the market. Two real-world wrinkles are why the question asks for approximate proceeds: a marketable order can receive some price improvement inside the quote, and if the displayed bid is for fewer than 500 shares the balance may fill at a lower price. For computing expected proceeds, the quoted bid is the reference price.

The Trap: direction-flip

• $9,125: Midpoint assumption: $9,125 is 500 × $18.25, the average of the bid and the ask. A market order takes the best price available on the customer's side of the market — here the $18.20 bid. A marketable order may sometimes be improved inside the quote, but the midpoint is not the expected fill, so proceeds are figured on the bid.
• $9,050: Spread double-counted: 500 × ($18.20 − $0.10) subtracts the spread a second time, as if it were a separate fee. The spread is already paid implicitly by receiving the bid rather than the ask.
• $9,150: Direction flip: 500 × $18.30 uses the ask. The ask is the lowest price a seller will accept, so it is where customers buy, not where they sell — this is the single most-missed point in the cluster.

Verified against: spread as implicit cost); investor.gov glossary — Bid Price (highest price a buyer will pay) and Ask Price (lowest price a seller will accept)

Answer: Buy 1,000 shares at $20.50 and sell 1,500 shares at $20.55

Quote sizes are expressed in round lots — typically 100 shares each — and are read in the same order as the prices: bid size × ask size. So "20.50 – 20.55, 10 × 15" means the market maker will buy up to 1,000 shares (10 round lots) at the $20.50 bid and sell up to 1,500 shares (15 round lots) at the $20.55 offer. Reading "10 × 15" as individual shares is the classic units trap, and reversing either the sides (dealers buy at the bid, sell at the ask) or the size order changes the meaning of the display entirely.

The Trap: round-lot-units

• Buy 1,500 shares at $20.50 and sell 1,000 shares at $20.55: Size-order confusion: the sizes read bid size × ask size, so 10 lots belong to the bid and 15 lots to the offer — this swaps them.
• Sell 1,000 shares at $20.50 and buy 1,500 shares at $20.55: Side flip: the first number is the bid (where the dealer buys) and the second is the offer (where the dealer sells) — this reverses them.
• Buy 10 shares at $20.50 and sell 15 shares at $20.55: Round-lot units misread: quote sizes are stated in round lots (typically 100 shares), not individual shares.

Verified against: Standard OTC/Nasdaq quote-size convention: quotation sizes are stated in round lots (100-share units) per market-data dissemination practice

Answer: 25.15 – 25.25

The inside market — the national best bid and offer (NBBO) under SEC Regulation NMS — is built from the best price on each side across all markets: the HIGHEST bid (best for sellers, since customers sell at the bid) and the LOWEST offer (best for buyers, since customers buy at the ask). Here that is Market Maker B's 25.15 bid paired with Market Maker C's 25.25 offer, so the inside market is 25.15 – 25.25 — a market no single dealer displays on both sides. Watch the three traps. First, any one market maker's quote is only the NBBO if that dealer happens to post the best price on both sides, and Market Maker A posts the best price on neither. Second, combining the lowest bid with the highest offer produces the widest possible market, the opposite of the inside market. Third, taking the highest number in both columns forgets that "best" on the offer side means cheapest.

The Trap: nbbo-vs-single-dealer

• 25.10 – 25.30: NBBO-vs-single-dealer confusion: this is just Market Maker A's quote; the inside market is assembled from the best price on each side across all market makers, and Market Maker A has the best price on neither.
• 25.05 – 25.35: Inverted "best" logic: this combines the LOWEST bid and HIGHEST offer — the widest possible market, the opposite of the inside market.
• 25.15 – 25.35: Half-flip: takes the highest number in both columns; the best offer is the LOWEST ask, because that is the cheapest price a buyer can pay.

Verified against: SEC Regulation NMS — National Best Bid and Offer (NBBO/inside market) construction

Answer: Stock X's narrow spread reflects an active, liquid market, while Stock Y's wide spread imposes a higher implicit cost on a customer who needs to trade it promptly

The bid–ask spread acts as an implicit transaction cost and a real-time gauge of liquidity. Stock X's two-cent spread on an $84 stock (about 0.02% of the price) signals deep, competitive, active trading. Stock Y's sixty-cent spread is the opposite: a buyer who paid the 6.70 ask and immediately resold at the 6.10 bid would give up 0.60 — nearly 9% of the purchase price — before the stock moved at all. That wide spread is a cost to the customer, not extra room to profit (B). Spread width and reported volume generally travel together as liquidity measures, so the quote itself is evidence about liquidity rather than silent on it (C). And a market order does not dodge the spread — it pays it, buying at the ask and selling at the bid (D). Only a passive limit order resting at or inside the quote can avoid crossing the spread, and it does so by trading away the certainty of immediate execution: the spread is essentially the price of immediacy.

The Trap: wide-spread-better

• A customer can avoid Stock Y's spread cost entirely by using a market order instead of a limit order: Treats the spread as an avoidable explicit fee, and reverses the order types: a market order crosses the spread by construction — buying at the ask and selling at the bid — so it pays the full spread. A resting limit order is what can avoid crossing, at the price of giving up certain immediate execution.
• Stock Y offers investors the better opportunity because the wider spread leaves more room for the price to move in their favor: Wide-spread-better inversion: the spread is a cost the customer pays, not profit potential — wide means expensive and illiquid.
• The spreads reveal nothing about liquidity; only reported trading volume indicates how liquid a stock is: Denies the spread-liquidity link: spread width is itself a standard indicator of liquidity — narrow quotes signal active two-sided interest, and regulators describe more liquid, higher-volume securities as typically having tighter spreads.

Verified against: teaching angle: liquidity ladder). Corroborated: SEC/investor.gov Updated Investor Bulletin: Exchange-Traded Funds (more liquid, higher-volume securities typically have tighter spreads; the spread is a hidden cost that reduces returns).

Answer: The prices are approximate and must be confirmed with the dealer before any trade can take place

A quote labeled "subject" is not firm: it indicates where the dealer believes the market is, and the price must be confirmed — and may be revised, or may already be gone — before a trade happens. Contrast the firm quote. Under FINRA Rule 5220 (Offers at Stated Prices), a dealer making a firm market is expected to buy or sell at least a normal unit of trading (one round lot) at its prevailing quotations, but that expectation applies only when the quote is not "clearly designated as not firm." Saying "subject" is precisely that designation, which is why no trading obligation attaches — and a member is in fact required to correctly identify the nature of its quotes when it supplies them. Two further traps. First, one dealer's quote is not the inside market: the inside market (NBBO) is the highest bid and lowest offer assembled across all market participants, not a single phone quote in a thinly traded name. Second, read the quote from the dealer's own side — it buys at its bid (15.00) and sells at its offer (15.50), never the reverse; the caller trades on the worse side of that spread. Finally, keep "subject" distinct from a related term you may see: a nominal quote goes further still, being an indication of price given solely for informational purposes — such as for valuation — rather than a price the dealer is working toward a trade on.

The Trap: subject-vs-firm

• The dealer stands ready to buy at $15.50 and sell at $15.00: Direction flip from the dealer's perspective: a dealer buys at its bid (15.00) and sells at its offer (15.50), not the reverse. (A 'subject' quote also carries no standing-ready obligation at all, so this option fails twice.)
• The quote represents the inside market for MNO across all dealers: NBBO-vs-single-dealer confusion: this is one dealer's indication given over the phone, not the inside market — the highest bid and lowest offer compiled across all market participants.
• The dealer is obligated to trade at least one round lot at the stated prices: Subject-vs-firm confusion: this states the FIRM-quote standard. Under FINRA Rule 5220, a dealer making a firm market is expected to buy or sell at least a normal unit of trading at its quoted prices — but only 'unless clearly designated as not firm.' The word 'subject' is exactly that designation, so no such obligation attaches here.

Verified against: FINRA Rule 5220 (Offers at Stated Prices) — firm quote obligation vs. quotes clearly designated 'subject' or nominal

Answer: The market maker stands ready to buy from customers at $42.00 and sell to customers at $42.10, keeping the $0.10 spread as its compensation

A quote belongs to the dealer publishing it: the market maker buys at its bid ($42.00) and sells at its offer ($42.10), so customers necessarily transact on the opposite side — selling at the bid and buying at the ask. The $0.10 spread is the market maker's compensation for standing ready to trade as principal from its own inventory, and that capacity (principal/dealer versus agent/broker) must be disclosed to the customer on the trade confirmation under SEC Rule 10b-10. The two capacities carry different compensation models, and the SIE tests them as distinct: an agency trade earns a commission, while a principal trade's compensation is built into the price itself as a markup (customer buys) or a markdown (customer sells). That is why a market maker's $0.10 is the spread inside the quote rather than a commission layered on top of it. Reversing the sides — in either the customer's or the dealer's direction — is the core trap this topic tests; the currency-exchange kiosk is the reliable memory aid, since the kiosk always buys your money low and sells it back high, leaving you on the worse side of both prices.

The Trap: dealer-perspective

• Customers buy from the market maker at $42.00 and sell to it at $42.10: Direction flip: this gives customers the dealer's favorable side; customers actually buy at 42.10 (ask) and sell at 42.00 (bid).
• The market maker buys stock at $42.10 and resells it at $42.00: Dealer-side flip: buying high and selling low would guarantee losses; the dealer buys at the lower bid and sells at the higher ask.
• The market maker charges each customer a $0.10-per-share commission in addition to the quoted prices: Mixed-vocabulary distractor: the $0.10 is the spread already built into the quoted prices, not a separate charge added on top. A market maker trades as principal, so its compensation is embedded in the price as a markup or markdown rather than assessed as an agency commission alongside the quote.

Verified against: misconception: dealer vs customer perspective). Verified against investor.gov glossary (bid price / ask price) and sec.gov/answers/spread.htm; capacity disclosure per SEC Rule 10b-10.