What is Negative Obligation?
In the trading world, negative obligation refers to a stock specialist's responsibility to avoid buying or selling for their own accounts in order to match orders. The New York Stock Exchange imposes this rule on its specialists.
How Does Negative Obligation Work?
For example, let's assume the pension plan wants to sell 1 million 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 from the pension plan for the brokerage firm's own account, but because the specialist has a negative obligation, she must avoid buying the for her own account and instead focus on matching other buyers with the seller.manager of a large state
Why Does Negative Obligation Matter?
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.