Dealers and Changing Obligations: The Case of Stub Quoting

35 Pages Posted: 22 Dec 2012 Last revised: 1 Aug 2014

See all articles by Jared F. Egginton

Jared F. Egginton

Boise State University - College of Business & Economics

Bonnie F. Van Ness

University of Mississippi - Department of Finance

Robert A. Van Ness

University of Mississippi - Department of Finance

Date Written: June 26, 2014

Abstract

We examine the liquidity providing behavior of NASDAQ market makers surrounding two periods of changing dealer obligation. The first change in November, 2007 is the relaxation of Rule 4613, which required NASDAQ market makers to place two-sided quotes “reasonably related” to the current best bid and offer. The relaxation of this rule permitted NASDAQ market makers to post quotes far away from the prevailing market, a practice frequently referred to as stub quoting. The second is the Securities and Exchange Commission ban on stub quoting in December, 2010, which requires market makers to quote within a predefined distance from market prices. We find evidence that placing restrictions on stub quoting alters market makers’ liquidity providing behavior in both the 2007 and 2010 rule change periods. Stub quoting restrictions increase the time that market makers quote at the NBBO. We also find evidence that stub quoting restrictions increase the proportion of daily volume executed in the 2007 time period by market makers. However, we find little evidence that stub quoting rules impact the participation of market makers during days with excessive volatility.

Keywords: Stub quoting, dealers, NASDAQ

Suggested Citation

Egginton, Jared Frank and Van Ness, Bonnie F. and Van Ness, Robert A., Dealers and Changing Obligations: The Case of Stub Quoting (June 26, 2014). Available at SSRN: https://ssrn.com/abstract=2192703 or http://dx.doi.org/10.2139/ssrn.2192703

Jared Frank Egginton

Boise State University - College of Business & Economics ( email )

United States
2084264586 (Phone)

Bonnie F. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States
662-915-6749 (Phone)
662-915-7968 (Fax)

Robert A. Van Ness (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

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