What Is a Stub Quote?

A stub quote, also known as a placeholder quote, is an order to buy or sell shares that is deliberately set far lower or higher than the prevailing market price. Stub quotes are used by 澳洲幸运5官方开奖结果体彩网:market makers who wish to fulfill their liquidity obligations with🐓out intending for their orders t🧜o be executed.

How Stub Quotes Work

Stub quotes are used by market makers who are required to ꩵbuy and sell shares of a security but do not want to do so at its current market price. In this situation, market makers can enter stub quotes that are so far from the prevailing market price that they are unlikely to be accepted by other market participants.

Market makers and specialists are required by the exchanges they participate in to make continuous two-sided markets (i.e., a 澳洲幸运5官方开奖结果体彩网:two-way quote with both a bid and an offer) in order to provide liquidity in the names they are active in. The stub quote allows a market maker to fulfill this duty, but in a non-committ🐼al way, whiꩵch can be frowned upon.

To illustrate, suppose ABC Trading is a market maker for Example Corporation, whose stock is currently trading with a 澳洲幸运5官方开奖结果体彩网:bid-ask spread of $40 to $40.50 per share. As a market maker, ABC Trading i♓s required to buy and sell a certain amount of Example Corporation stock each day. However, if ABC Trading does not want to increase its exposure to Example Corporation stock, it might circumvent its obligation by offering shares at a bid-ask spread that is far away from the best available market price, such as $4.00 to $405 per share.

Real-World Example of Stub Quotes

Typically, stub quotes would never be executed by the market. However, they can affect the market on rare occasions. For example, stub quotes are generally regarded as having contributed to the 澳洲幸运5官方开奖结果体彩网:Flash Crash of May 2010. On that day, the 澳洲幸运5官方开奖结果体彩网:Dow Jones Industrial Average dropped nearly 1,000 points due in part to the fact that stub quotes entered by market makers were inadvertently triggered during the day’s decline. A report from the 澳洲幸运5官方开奖结果体彩网:Co🌳ಞmmodity Futures Trading Commission (CFTC) in 2014 described the Flash Crash of May 2010 as one of the most turbulent periods in the historyꦑ of financial markets.

In November 2010, the 澳洲幸运5官方开奖结果体彩网:U.S.🎐 Securities and Exchange Commission (SEC) announced new regulations scaling back the use of stub quotes by market makers. The new regulations require market makers to issue quotes that are within a certain percentage of the best available market price, which is known as the 澳洲幸运5官方开奖结果体彩网:national best bid and offer (NBBO). Depending on the circumstances♑, these quotes might be allowed to deviate by as much as 30% or as little as 8%. These rules have been in effect since December 2010.