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Stub Quote Rule Violations - Letter to Mary Schapiro

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Dear Mrs. Schapiro,

We would like to thank the SEC for implementing the Stub Quote Rule in December of 2010. While stub quoting did not cause the Flash Crash of May 6th 2010, it was a contributing factor and we welcome the stub quote ban.

However, after studying four recent trading days, we have a question. Is there any intention of enforcing the stub quote rule? If so, can you please tell us when?

The SEC document states:
  • For securities in the S&P 500 or Russell 1000 indexes, market makers must enter quotes that are not more than 9.5% away from the NBBO. During the first 15 and last 25 minutes of trading, entered quotes must be no further than 21.5% away from the NBBO. For all other exchange-listed equities, it's 31.5%*.

    * note: The quote is allowed to "drift" an additional 1.5%.away from the BBO bands -- so 8% becomes 9.5%, 20% becomes 21.5% and 30% becomes 31.5%.
We processed all quotes for each of the last 4 days (we have some experience with this), and printed out the time, symbol, and offending quote that was outside a generous 32% band. Here are the results (note how often a bid is at a penny!): Because a picture can be worth a thousand words (or a text file with over a million stub quotes), we present you with four random images of stub quoting in 2011:
  1. 05/11/2011 - RJL Lodging Trust
    On 05/11/2011 the stock RLJ began it's first day of trading (an IPO). The first trade was at $17.25 followed by a series of trades at $0.0001 before resuming at $17.07.
  2. 05/13/2011 - Enstar Group
    On 05/13/2011 the stock ESGR opened at $102.00 and quickly fell to $0.01.
  3. 08/05/2011 - SPDR Barclays Capital Conver
    Chart showing typical stub quoting well below the stub quote banding rules. Note the price activity that follows.
  4. 08/08/2011 - Direxion Mid-Cap-Bull
    Another typical example of stub quoting we see on a daily basis.
We have presented a mere handful of examples. Should you desire more data, we have a mountain of it.

Finally, given the simplicity of the stub quote rule, we would like to ask what mechanisms the SEC will have in place to enforce the ever more complex Limit Up/Limit Down rule.

Thank you for your time.


Publication Date: 08/11/2011

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