Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Negative Obligation

What it is:

In the trading world, negative obligation refers to a stock specialist's responsibility to avoid buying or selling shares for their own accounts in order to match orders. The New York Stock Exchange imposes this rule on its specialists.

How it works (Example):

For example, let's assume the asset manager of a large state pension plan wants to sell 1 million shares of Company XYZ, which trades on the New York Stock Exchange. It's a big order for the pension plan's brokerage firm. The firm's specialist, on the floor of the New York Stock Exchange, is engaged in matching buyers for the order. It would be easier and even profitable for the specialist to buy some of the Company XYZ shares from the pension plan for the brokerage firm's own account, but because the specialist has a negative obligation, she must avoid buying the shares for her own account and instead focus on matching other buyers with the seller.

Why it Matters:

A specialist's job is to facilitate trades rather than speculate on stocks. By preventing specialists from trading from their own accounts all the time, the specialist allows investors the same opportunity to trade securities and thus helps keep a level playing field.