Stub Quote Explained 2025: How It Works & Real Market Impact
Discover what stub quotes are, how market makers use them, and their influence on stock trading, including insights from the 2010 Flash Crash and updated SEC regulations.
Understanding Stub Quotes
A stub quote is a deliberately placed buy or sell order set significantly above or below a stock's current market price, making it unlikely to be executed. This strategy is mainly employed by market makers to meet liquidity obligations without intending actual trade execution.
What Exactly Is a Stub Quote?
Also referred to as a placeholder quote, a stub quote is an order positioned far from the prevailing market price. Market makers use these quotes to comply with regulatory requirements mandating continuous two-sided markets, ensuring liquidity for securities they handle.
Key Points to Remember
- Stub quotes are limit orders set well beyond the current market price and are not meant for immediate execution.
- They help market makers fulfill obligations to maintain active bid and ask prices.
- On rare occasions, stub quotes can influence market behavior, notably during the May 2010 Flash Crash.
- Since late 2010, the SEC has implemented rules to limit the use of stub quotes.
How Do Stub Quotes Function?
Market makers are obligated to provide continuous bid and ask quotes for securities but may not wish to trade at current prices. By placing stub quotes far from the market price, they technically satisfy their duties without increasing exposure.
For example, if a stock trades between $40.00 and $40.50, a market maker might place a bid at $4.00 and an ask at $405.00, effectively avoiding execution while maintaining required market presence.
Real-World Impact: The 2010 Flash Crash
Stub quotes rarely execute but can impact markets under volatile conditions. During the May 2010 Flash Crash, stub quotes contributed to a dramatic plunge in the Dow Jones Industrial Average by nearly 1,000 points. The Commodity Futures Trading Commission described this event as one of the most chaotic in financial history.
In response, the SEC introduced regulations in November 2010, enforcing that market makers' quotes remain within a specified range of the national best bid and offer (NBBO), typically between 8% and 30% deviation. These measures have been active since December 2010, enhancing market stability.
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