SEC's ban on stub quoting

November 30, 2010 06:00 PM

In addition to banning naked access, the SEC also approved measures to ban stub quoting, a practice that came to light following May 6. With a stub quote, a market maker is able to enter a "placeholder" bid or quote that is drastically away from the national best bid or offer (NBBO). While these bids were never meant to be hit, some stocks traded for as low as a penny and as high as $100K on May 6 bringing the practice to light.

The SEC approved measures to ban stub quotes by placing bid/offer bands on stocks that market makers must meet. In the case of those stocks under the single stock circuit breaker program, that band was set at 8% away from NBBO.

While regulators are moving to eliminate the practice, it has left some to wonder why they existed in the first place. "As a market maker, you should be making a two-sided market by definition," Joseph Saluzzi, co-head of equity trading at Themis Trading, says.

While it is a step in the right direction, Bottini doesn’t see much of an impact for retail investors. "Customers don’t want to be filled at a penny, but they also don’t want to be filled at 8% outside of NBBO. They want confidence in the marketplace and that only comes from larger structural changes and time," he says.

About the Author

Web Editor/Assistant Editor Michael McFarlin joined Futures in 2010, after graduating summa cum laude from Trinity International University, where he majored in English/Communication. With the launch of the new web platform, Michael serves as web editor for the site and will continue to work on the magazine, where he focuses on the Markets and Trading 101 features. He also served as a member of the Wisconsin National Guard from 2007 to 2010.