The Securities and Exchange Commission today brought down the banhammer on “stub quotes,” market orders for a stock that are wildly different from the most recent price.
Why not allow market makers to put in placeholder bids and offers for stocks that are as high as $1,000 a share or as low as a penny a share? Because of the Flash Crash, of course! Bloomberg reports:
The SEC mandated that market makers’ quotes be within 8 percent of the national best bid or offer, known as the NBBO, according to a statement e-mailed today. The rule begins Dec. 6.
The idea is to keep the market from suffering the major shocks it experienced on May 6, when the Dow Jones Industrial Average lost nearly 1,000 points in minutes. Stub quotes were considered one possible reason for the volatility seen during the Flash Crash, but there are other problematic stock-market practices that have yet to be addressed.
mtaylor [at] observer.com | @mbrookstaylor