Stub Quote

What Is a Stub Quote?

A stub quote, otherwise called a placeholder quote, is an order to buy or sell shares that is intentionally set far lower or higher than the predominant market price. Stub quotes are utilized by market makers who wish to satisfy their liquidity obligations without proposing for their orders to be executed.

How Stub Quotes Work

Stub quotes are utilized by market makers who are required to buy and sell shares of a security however don't have any desire to do as such at its current market price. In this situation, market makers can enter stub quotes that are such a long ways from the predominant market price that they are probably not going to be accepted by other market participants.

Market makers and experts are required by the exchanges they participate in to make continuous two-sided markets (i.e., a two-way quote with both a bid and an offer) to give liquidity in the names they are active in. The stub quote permits a market maker to satisfy this duty, however in a hesitant way, which can be disapproved of.

To represent, assume ABC Trading is a market maker for Example Corporation, whose stock is currently trading with a bid-ask spread of $40 to $40.50 per share. As a market maker, ABC Trading is required to buy and sell a certain amount of Example Corporation stock every day. Nonetheless, if ABC Trading would rather not increase its exposure to Example Corporation stock, it could evade its obligation by offering shares at a bid-ask spread that is far away from the best accessible market price, for example, $4.00 to $405 per share.

Genuine Example of Stub Quotes

Normally, stub quotes could never be executed by the market. Be that as it may, they can influence the market on rare events. For instance, stub quotes are generally viewed as having contributed to the Flash Crash of May 2010. On that day, the Dow Jones Industrial Average dropped almost 1,000 points due in part to the way that stub quotes entered by market makers were accidentally set off during the day's decline. A report from the Commodity Futures Trading Commission (CFTC) in 2014 depicted the Flash Crash of May 2010 as perhaps of the most tempestuous period in the history of financial markets.

In November 2010, the U.S. Securities and Exchange Commission (SEC) announced new regulations downsizing the utilization of stub quotes by market makers. The new regulations require market makers to issue quotes that are inside a certain percentage of the best accessible market price, which is known as the national best bid and offer (NBBO). Contingent upon the conditions, these quotes may be permitted to go amiss by as much as 30% or just 8%. These rules have been in effect since December 2010.

Features

• They are generally involved by market makers to satisfy regulatory requirements of posting continuous two-sided markets.
• Since November 2010, the SEC has done whatever it takes to reduce the practice of stub quotes.
• Stub quotes are limit orders set far above or below a stock's current market price and are not planned to be promptly executed.
• On rare events, stub quotes can influence the market, like on account of the May 2010 Flash Crash.