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Quote Stuffing Banned!

Rule change proposed by the NYSE marks the beginning of the end of quote manipulation
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Update: See Is The SEC Finally Waking Up.

This week, the NYSE and NYSE/Arca have individually filed proposed rule changes that adopt the text of FINRA's (Financial Industry Regulatory Authority) rule 5210, which prohibits the publication of manipulative or deceptive quotations or transactions. The documents specifically use the term Quote Stuffing; a phrase Nanex coined after finding symbols with thousands of quotes per second while researching the flash crash.

Search for 34-65954 or 34-65954 under the Regulatory Actions section here on the SEC site. You can submit comments to the SEC about NYSE's proposal here, and NYSE-ARCA's proposal here. The proposals are practically identical.

PDF of NYSE filing (Release No. 34-65954, File No. SR-NYSE-2011-61).
PDF of NYSE/Arca filing (Release No. 34-65955, File No. SR-NYSEArca-2011-90).

This is both a major and a significant first step in the right direction. Because a significant percentage of quotes today are - practically speaking - deceptive, this new ruling should reverse the non-stop explosion of worthless quotes that have plagued our markets since the adoption of Reg NMS in early 2007.

1-minute Average of the Number of Quotes per $10,000 in Trade Transactions.
Time scale shows hour and minute of the trading day (9:30 to 16:00 Eastern). Each trading day between January 1, 2007 and December 21, 2011 is color coded by date: older dates are colored towards the violet end of the spectrum, while more recent dates are colored towards the red end of the spectrum. We had to process about 600 billion quotes and 40 billion trades over about 1,250 trading days to generate these charts. The chart on the right is plotted in reverse order.

(click charts for higher resolution)

1-second Peak Equity Quote Rate.
When Reg NMS was adopted in early 2007, equity quote rates in the U.S. were approximately 6,000/sec. That rate now exceeds 600,000/sec, a level 100 times higher.

(click charts for higher resolution)

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Publication Date: 12/21/2011

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