U.S. securities regulators and the main exchanges are set on Monday to dig into the details of tighter market making rules that would ban most stub quotes, according to two people familiar with the plan.
The U.S. Securities and Exchange Commission wants to get rid of stubs — orders placed well off the market price of stocks, many of which were executed in the May "flash crash" — and the issue is a top priority, said three people familiar with the plan.
A Monday afternoon conference call will focus on a specific proposal from the Nasdaq Stock Market and on how to deal with stub orders on stocks that are not currently covered by a new circuit breaker, two sources said.
Reuters reported last month the SEC was considering forcing market makers to quote within the 10 percent circuit breaker band, possibly within 8 percent of the stock's price.
Circuit breakers, which pause trading when specific stocks move sharply, are part of the fallout from the flash crash in which the Dow Jones industrial average dropped some 700 points in minutes before sharply rebounding.
Staff at the SEC's trading and markets division were expected on the call, a source said, adding other exchanges could possibly submit a rule proposal that differs from Nasdaq OMX Group Inc.'s plan.
The sources said no timeline was set for implementing the new rules. They requested anonymity because they were not authorized to speak publicly.
Market makers typically use their own capital to take both sides of the market, essentially buying and selling without taking long-term bets so that investors can easily trade.
The disappearance of useful liquidity is seen as a cause of the flash crash, which also brought calls for a crackdown on stub quotes. Many stubs placed by market makers and others were executed on May 6 for as little as a penny.
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