The SEC on Monday announced a ban on a market-maker pricing practice known as stub quotes, prohibiting a technique that caused shares to trade as low as 1 cent during the May 6 crash.
Stub quotes are placeholders provided by market makers to satisfy a regulatory obligation to submit both bids and offers. Transactions aren’t meant to occur at those levels, which are at prices such as a penny or thousands of dollars.
On May 6, when a 20-minute rout briefly erased $862 billion in value before stocks rebounded, companies such as Accenture tumbled as traders pulled out of the market, leaving only stub quotes.
The SEC mandated that market makers’ quotes be within 8% of the national best bid or offer, known as the NBBO, according to a statement e-mailed on Monday. The rule is effective Dec. 6.
The requirements are aimed at preventing circuit breakers that pause trading for S&P 500 index and Russell 1000 index companies, as well as some ETFs, from being triggered. The curb, introduced in June for S&P 500 companies, was expanded to the Russell 1000 and 344 ETFs. It halts trading for a security for five minutes once it rises or falls at least 10% within five minutes.
NYSE Euronext, Nasdaq OMX Group and BATS Global Markets, which own the biggest U.S. stock markets, requested the change in September.
Before 9:45 a.m. and after 3:35 p.m. ET, when the volatility curbs don’t operate, quotes will have to be no more than 20% away from the best nationally available price. For securities not subject to trading curbs, market makers must quote within 30% of the best price.