Research uncovers stub quote ban work around


After the May 2010 Flash Crash, the SEC banned so-called stub quotes, which actually executed in some cases during the mini-crash.

Stub quotes were never designed to actually execute. They were always there as a placeholder, allowing market makers to nominally comply with its obligation to maintain a two-sided quotations at times during which it would rather be out of the market.

Have high-frequency traders found a way around the stub quote ban?

Nanex Research says it has discovered that some algorithms are effectively re-creating these quotes. It writes that, "Some of the more nefarious algos run tests by rapidly placing and canceling orders in a way to fool other algorithms into showing themselves, to freak humans out, or in this case to artificially create stub quotes. Stub quotes, a significant cause of bad fills during the Flash Crash, were banned by the SEC. Well, here's one way an algo can appear to meet Stub Quote requirements, but back-off the market in a way that all the benefits of stub quotes remain intact. Here's an example of prices changing by 10% in another stock on the same day."

The firm details a stock whose bid ranges from about $6 to $50 and the ask from $500 to $55.

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