Forensics Journal - Stevenson University 2012 | Page 21

FORENSICS JOURNAL 4. STUB QUOTES this market depth definition regarding transaction execution locations. Traders must have access to a location with sufficient volume to execute their order. A stub quote is “an offer to buy or sell a stock at a price so far away from the prevailing market price that it is not intended to be executed” (SEC Approves 1). Market makers are obligated to provide liquidity, especially in times of volatility, such as May 6, 2010. The obligation to provide liquidity involves supplying transactions on both sides of the market. On May 6th the volatility of the market accelerated the rate of price movement and caused some stocks, such as Accenture, to plummet. Maintaining a market for these shares required constant re-evaluation of quoted positions resulting in more sell orders than buy orders. The nearly valueless quotes executed that day were stub quotes, and were not intended for execution. The current market structure is fragmented. There are several entry points available for traders, both retail and institutional, to execute their orders. The prices for a given security may vary slightly depending on the entry point due to quoting activity displayed in the given market. In addition, not all entry points are visible to one another. One example is “dark pools.” Dark pools are used by institutional investors. Typically, they are used to conceal large block trades from the investing public and other large investors. James Brigagliano notes that dark pools are scrutinized for both their lack of transparency and their limited availability solely to institutional investors. Retail investors, in particular, argue that dark pools put them at a competitive disadvantage because they cannot see the true demand for a security and may miss out on the best price. Institutional investors argue that disclosing large block orders will prevent them from receiving best execution in the form of best pricing because HFT and other electronically nimble traders will be able to benefit from the pricing changes that the large institutional orders generate. Meanwhile, regulators are also disadvantaged because only trades, and not quotes, are displayed on the consolidated tape. The consolidated tape is further limited for dark pools in that it only displays the trade without providin