WHAT IS Stub Quote
A stub quote is an order placed well off a stock’s market price without intending the order to be executed. A stub quote is also referred to as a placeholder quote because no counterparty would agree to such an absurdly priced transaction.
BREAKING DOWN Stub Quote
A stub quote is an offer to buy or sell a stock at a price so far off from the prevailing market that it is not meant to be executed. For example, this could mean an order to buy at five cents or an offer to sell at $200,000.
Stub quotes are used by trading firms when the firm doesn't want to trade at a certain price and intends to pull away to ensure no trades occur. In order to make this happen, the firm will offer quotes that are regarded as out of bounds. A stub quote also serves as a safety net to avoid risks. If a market maker doesn't have enough liquidity available to trade a stock near its recent price range, then a stub quote is entered so that the market maker complies with the requirement to maintain a two-sided quotation while at the same time not extending quotes beyond the stock’s available liquidity.
Examples of Stub Quotes
A hypothetical example of a stub quote could be a trading firm setting stub bids at two cents and stub offers at $2,000. Since the quotes are so dramatic, on a normal market trading day, these types of trades are generally not executed.
Typically stub or placeholder quotes would never be reached, however their presence can affect the market on rare occasions. Stub quotes are regarded as one of the causes of the Flash Crash of May 2010 when the Dow Jones Industrial Average dropped nearly 1,000 points because the out of bounds prices of the stub quotes were inadvertently executed when the market dropped dramatically that day.
In the afternoon of May 6, 2010, the Dow Jones Industrial Average was down 300 points for the day. Market equity began to fall rapidly, dropping 600 points in five minutes for a loss of nearly 1,000 points. Twenty minutes later, the market had regained most of the 600-point drop. A report from the Commodity Futures Trading Commission in 2014 described the Flash Crash of May 2010 as one of the most turbulent periods in the history of financial markets.