The SEC approved the new rules submitted by the Exchanges and FINRA aimed at strengthening the minimum quoting standards for market makers and effectively prohibiting "stub quotes" in the U.S. equity markets.  New market maker quoting requirements go effective 12/6/10.

A stub quote is an offer to buy or sell a stock at a price so far away from the prevailing market that it's not intended to be executed.  A market maker may enter stub quotes to nominally comply with its obligation to maintain a two-sided quotation at those times when it doesn't wish to actively provide liquidity.  

Executions against stub quotes represented a significant proportion of the trades that were executed at extreme prices on May 6, and subsequently broken.  SEC Chairman Mary Schapiro once again noted the importance of restoring investor confidence following the Flash Crash of May 6.

    Under the New Rules.   Market makers (MM's) will be required, in exchange-listed equities, to maintain continuous 2-sided quotations during regular market hours that are within a certain percentage band of the NBBO.  The band would vary based on different criteria:

• For securities subject to the circuit breaker pilot program approved this past summer, MM quotes must be within 8% of the NBBO.
• Near the opening and the closing where the circuit breakers aren't applicable - i.e., before 9:45 a.m., after 3:35 p.m. - MM quotes must be within 20% of the NBBO.
• For exchange-listed equities not included in the circuit breaker pilot program, MM quotes must be within 30% of the NBBO.
• In each of these cases, a MM's quote may "drift" an additional 1.5% away from the NBBO before a new quote within the applicable band must be entered.

    SEC's Other Responses to Flash Crash.   Among other things, the SEC has:

• Approved the above-mentioned circuit breaker pilot program (trading pauses if a stock price moved >10% in 5 minutes). The program covers stocks in the S&P 500 the Russell 1000, plus certain ETF's.
• Approved new rules requiring exchanges to clarify up-front how and when trades would be broken.
• Proposed a new rule to require the SRO's to establish a consolidated audit trail system, enabling them to track information related to trading orders received and executed across the securities markets.
• Adopted rules to effectively prohibit B/D's from providing their customers with unfiltered access to exchanges and ATS's by assuring that B/D's implement appropriate risk controls.

At Chairman Schapiro's request, Commission staff is continuing to evaluate further initiatives to address market structure issues revealed by the events of May 6 such as refining the single stock circuit breakers by incorporating a limit-up/limit-down type mechanism. 

For further details, click onto:   [ SEC PR 10-216, 11/8 ]  and  [ SEC Order Approving New Rules, 11/5 ]