SEC bans stub quotes blamed for flash-crash losses

The U.S. Securities and Exchange Commission banned a market-maker pricing practice known as stub quotes, prohibiting a technique that caused shares to trade as low as 1 cent during the May 6 crash. Stub quotes are placeholders provided by market makers to satisfy a regulatory obligation to submit both bids and offers. Transactions aren't meant to occur at those levels, which are at prices such as a penny or thousands of dollars. On May 6, when a 20-minute rout briefly erased $862 billion in value before stocks rebounded, companies such as Accenture Plc tumbled as traders pulled out of the market, leaving only stub quotes. The SEC announced the ban today. “We won't have problems like we saw on May 6 where the only bid was for one penny and the only offer for $1,000,” said Justin Schack, a director in market structure analysis at Rosenblatt Securities Inc. in New York. “The new rule doesn't necessarily address all the problems related to brokers' order routing practices that were revealed on May 6,” Schack added. 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. Circuit Breakers The requirements are aimed at preventing circuit breakers that pause trading for Standard & Poor's 500 Index and Russell 1000 Index companies as well as some exchange-traded funds from being triggered. The curb, introduced in June for S&P 500 companies, was expanded to the Russell 1000 and 344 exchange- traded funds. It halts trading for a security for five minutes once it rises or falls at least 10 percent within five minutes. NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets, which own the biggest U.S. stock markets, requested the change in September. Before 9:45 a.m. and after 3:35 p.m. New York time, when the volatility curbs don't operate, quotes will have to be no more than 20 percent away from the best nationally available price. For securities not subject to trading curbs, market makers must quote within 30 percent of the best price. “Executions against stub quotes represented a significant proportion of the trades that were executed at extreme prices on May 6, and subsequently broken,” the SEC said today.