I am currently reading Market Liquidity by Foucault, Pagano and Röell. In chapter one they describe the limit order book markets and dealer markets.
I am confused about two rules that so called "broker-dealers" have to follow. These are the Quote Rule and the Limit Order Display Rule.
Reading the SEC on the rules: https://www.sec.gov/fast-answers/answerstrdexbd I cannot fully make sense of the rules.
Here is my attempt: Since broker-dealers act as both brokers for their clients and dealers on the market (on Nasdaq or as specialists on NYSE) they may have a perverse incentive to sell their clients securities at a high price directly form their dealership. However, as a broker they should try to find the best price for their clients.
The quote rule: The market maker must publish the best price he is willing to buy/sell at. Is this only to make sure that the market maker don't post bid/ask prices for their clients, that may be a lot higher than e.g. what they are actually willing to pay for with other clients/market makers?
The limit order display rule: The market maker must publish their clients limit orders if they are better than their dealer quotes. Again, I just need clarification. Is this simply, that the market maker must post quotes on e.g. the Nasdaq, which are in line with what their clients (broker side) is posting? However, if the market maker has to post new bid/ask prices that are in line with their clients, is this only for the volume that the client wants? If a client posts a better bid than the MM, but for one share, does the market maker have to trade more than this one share at said bid price?