Stub quoting is the act of placing quotes at absurd prices (to sell at extremely high prices or to buy at extremely low prices), which, in normal conditions, would not prompt a trade. Stub quotes may be placed by:
- Designated market makers, as a form of complying (or apparently complying) with the market making agreement when they are not able, or do not desire, to provide liquidity;
- Any trading firm, as a mean of testing trading systems or algorithms;
- Confused trading algorithms, during abnormal conditions;
- Mistake.
Stub quotes are considered by some to have had a critical impact in the 2010 Flash Crash, since, as prices reached abnormal levels, stub quotes got executed and therefore exacerbated the price fall.
Therefore, on November 2010, the SEC approved new rules, as proposed by the FINRA and by the US national securities exchanges, to forbidden stub quoting. In practice, such rules oblige market makers to quote within a certain percentage band in relation to the national best bid and offer (NBBO).
Therefore, on November 2010, the SEC approved new rules, as proposed by the FINRA and by the US national securities exchanges, to forbidden stub quoting. In practice, such rules oblige market makers to quote within a certain percentage band in relation to the national best bid and offer (NBBO).
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