NYSE Euronext, Nasdaq OMX Group Inc and Bats Global Markets sought permission from regulators yesterday to eliminate stub quotes, or bids and offers as low as pennies or as high as thousands of dollars provided by market makers that were blamed for worsening the May 6 crash.
The owners of the biggest US equity markets asked the Securities and Exchange Commission (SEC) to impose restrictions on how far from the national best bid or offer (NBBO), market makers can submit quotes. The requirements are aimed at preventing circuit breakers that pause trading for Standard & Poor’s 500 Index and Russell 1000 Index companies from being triggered.
Stub quotes are placeholders provided by market makers at prices as low as 1 cent to satisfy a regulatory obligation to submit both bids and offers. Transactions aren’t meant to occur at those levels. On May 6, when $862 billion was erased from US shares in less than 20 minutes, companies such as Accenture Plc tumbled to a penny as traders pulled out of the market, leaving fewer bids in order books. “It’s a good way to minimise the number of times the circuit breakers will be triggered,” said Jamie Selway, managing director at Investment Technology Group Inc in New York. Most of the circuit breakers that paused trading were triggered by errant transactions or executions that were later canceled. He added that the planned requirements are “minimalist obligations” for market makers.
S&P 500, ETFs
Circuit breakers, introduced in June for S&P 500 companies, have been expanded to stocks in the Russell 1000 and 344 exchange-traded funds. They halt trading for a security for five minutes once it rises or falls at least 10 per cent within five minutes. NYSE, Nasdaq and Bats asked the SEC to mandate that market makers’ bids and offers be within 8 percent of the NBBO.