Posted in Finance, Accounting and Economics Terms, Total Reads: 250
Definition: Stub Quote
A stub quote is an order of buying or selling an asset that is very different from the market price of the stock. A stub quote is used by a trading firm when it does not want to buy or sell a stock at a certain price and wishes to pull away so that no trade occurs.
For making sure that the trade does not happen, the firm usually offers a quote that is way out of the market price of the stock. A stub quote can also be used as a safety net to avoid risks if in case the market maker does not possess enough liquidity for being able to trade the stock at a price close to its price range. In such a case a stub quote is used for making the market maker able to comply with the requirements without making quotes that are higher than the liquidity available to him.
Stub quotes are seen as one of the reasons for the “Flash Crash” that occurred in May 2010. During the crash Dow Jones Industrial Average had observed a drop of nearly 1000 points. Due to this huge drop in the prices a lot of out of the bounds stub quote prices got executed. An example of the sub quotes can be issuing stub offers of $2000 when the stub bids are for 1 cent.