New York/Washington: US securities regulators are moving quickly to tighten rules for market makers and eliminate so-called stub quotes, to ensure there is liquidity during stressful times, according to sources familiar with the discussions.
Aiming to avoid a repeat of the stock market’s “flash crash” on 6 May, the US Securities and Exchange Commission and big exchanges are eyeing minimum obligations for market-making firms that would force them to submit quotes that are less than 10% away from a stock’s current price, three sources said.
One of the sources said a rule proposal could come within weeks. Another source said the SEC was trying to firm up the market-making rules before it must start crafting dozens of new rules prescribed by financial reform legislation.
The sources requested anonymity because the talks are continuing.
The flash crash, which is still unexplained, stripped the Dow Jones industrial average of some 700 points in minutes before it sharply recovered. The bounce rattled investors globally and sparked a handful of new rule proposals.
One key response was new market-wide circuit breakers, adopted last month, that halt trading when a stock moves 10% within five minutes. The new market-making obligations would force registered firms to quote inside that 10% band, the sources said.
An 8% quote band is one option being considered, one source said.
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 6 May crash.
The crash also brought calls for a crackdown on stub quotes, which are standing orders well off the current price of a stock. Many stubs placed by market makers and others were executed 6 May, for as little as a penny.
Democrats are trying to shepherd the financial reform bill through Congress so that President Barack Obama can sign it into law. The bill requires the SEC to adopt rules to supervise hedge fund advisers and the over-the-counter derivatives market, among other things.