The Securities and Exchange Commission (SEC) has announced new rules to prevent “stub quotes” from being used by traders in equity markets.
According to the industry regulator, stub quotes are thought to have been one of the main causes behind the ‘flash crash’ on May 6th.
A stub quote is an offer on a share which is not intended to be executed and could be entered by a market maker to comply with requirements to provide a two-sided quotation.
The new rules call for quotes, which are subject to the SEC’s circuit breaker technology, to be within eight per cent of the national best bid and offer.
Mary L Schapiro, SEC chairman, said: “By prohibiting stub quotes, we are reducing the risk that trades will be executed at irrational prices, and then need to be broken, if the markets become volatile.
“While we continue to look at other potential obligations for market participants, this is an important step in our effort to improve the functioning of the US markets, and restore investor confidence following the events of May 6th.
The new requirements will come into effect from December 6th 2010.
By Jim Ottewill