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September 10, 2007

Nasdaq Proposes Loosening Quoting Rules

By Peter Chapman

Stub quotes are getting Nasdaq's blessing. Nasdaq, with one eye on competitor NYSE Arca, plans to remove any doubt about market makers' use of stub quotes.

It is asking the Securities and Exchange Commission for permission to amend its Rule 4613 to eliminate the requirement that a Nasdaq market maker's quotes be "reasonably related to the prevailing market."

If Nasdaq gets its way, market makers who use widely spaced quotes such as those with 1-cent bids or $2,000 offers will not fall under a cloud of suspicion.

Nasdaq market makers are required to maintain two-sided quotes at all times. Rule 4613 states those quotes must be "reasonably related" to the current best bid and offer.

Nasdaq says Rule 4613 is ambiguous because it is difficult to determine whether or not a dealer's stub quote is reasonably related to the market. When compared against another dealer's quote, it may not be.

But when a market maker doesn't have a customer order to represent, it may be "an accurate reflection of the absence of such orders." Many dealers are simply using their quotes to represent customer orders, Nasdaq maintains, and not quoting for their own accounts.

In any event, Nasdaq maintains the amendment will not impair market quality. The exchange also notes that market makers quoting on NYSE Arca face no such restrictions.

The use of stub quotes is fairly common, traders say, and always has been. Dealers are often on just one side of the market. Nasdaq, which has of course evolved from a dealer to an agency-like marketplace in recent years, rarely penalizes dealers for using stub quotes.

The rule proposal contrasts sharply with the quoting guidelines of Nasdaq's new Select Market Maker program. In that case, the ranking process takes into account the tightness of dealer spreads.