U.S. securities regulators Monday approved a rule designed to outlaw the use of “stub quotes”, which was another factor in the so-called “flash crash” on May 6.

Stub quotes are offers 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. The U.S. Securities and Exchange Commission says that a market maker may enter stub quotes to nominally comply with its obligation to maintain a two-sided quotation when it does not wish to actively provide liquidity. “Executions against stub quotes represented a significant proportion of the trades that were executed at extreme prices on May 6, and subsequently broken,” it reports.

The new rules aim to address the problem of stub quotes by requiring market makers to maintain continuous two-sided quotations during regular market hours that are within a certain percentage of the national best bid and offer. The band would vary based on different criteria, starting at 8% and going as far as 30% from the NBBO.

“By prohibiting stub quotes, we are reducing the risk that trades will be executed at irrational prices, and then need to be broken, if the markets become volatile,” said SEC chairman, Mary Schapiro. “While we continue to look at other potential obligations for market participants, this is an important step in our effort to improve the functioning of the U.S. markets, and restore investor confidence following the events of May 6.”

The new market maker quoting requirements will become effective on December 6.

IE