AssetPreserver News

If you have ever watched level II quotes, you will see bids for $0.01 or ask $100,000 for a stock. These are stub quotes.

According to Investopedia: stub quote is an order placed well off a stock’s market price. Stub quotes are used by trading firms when the firm doesn’t want to trade at certain prices and wants to pull away to ensure no trades occur. In order to make this happen, the firm will offer quotes that are out of bounds. A stub quote also serves as a safety net in that if a market maker doesn’t have enough liquidity available to trade a stock near its recent price range, then a stub quote is entered so that the market maker complies with its requirements without extending its quotes beyond its available liquidity.

The SEC found that stub quotes represented a significant proportion of the trades that executed at “extreme prices” on May 6, the day of the Flash Crash. When market makers briefly stopped trading, the only quotes left were stub quotes (which were executed) causing the S&P 500 to drop 6% in a matter of minutes.

New rules that took effect this Monday (Dec 6, 2010) tighten the band to within 20% to 30% of the national best bid and offer. The 20% trigger occurs near the open and close (before 9:45 or after 3:35) and 30% for other times during market hours. The range can tighten to 8% for stocks participating in the new circuit breaker program.

Hopefully, this will add some order to the market.