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The image below shows the Level 2 bids for Fortescue Metals Group Ltd (OTCQX: FSUMF) on 2020-10-07 10:20 am:

FSUMF Level 2 bids on 2020-10-07 10:20 am

Notice the 0.01 × 10,000 bid by NITE (Virtu Americas LLC), which is extremely unlikely to be matched. What's the reason for placing a bid at an absurd price? Why don't market makers simply cancel their orders instead?

I've noticed this practice — market markers placing very low bids or very high asks — in many securities, so I think this is a rather common practice.

I understand that the minimum quotation size in this case is a function of the bid price (according to FINRA rule 6433. Minimum Quotation Size Requirements For OTC Equity Securities), so my question is more about the $0.01 bid price rather than the 10,000 bid size.

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These "absurd bid and ask prices" are called "stub quotes".

A stub quote is an offer to buy or sell a stock at a price so far away from the prevailing market that it is not intended to be executed, such as an order to buy at a penny or an offer to sell at $100,000. A market maker may enter stub quotes to nominally comply with its obligation to maintain a two-sided quotation at those times when it does not wish to actively provide liquidity.

(source)

In the USA, market makers are not allowed to enter stub quotes on Regulation NMS stocks during regular trading hours. This rule was introduced after the 2010 flash crash. The relevant SEC press release: SEC Approves New Rules Prohibiting Market Maker Stub Quotes.

However, FSUMF is an over-the-counter stock; it is not an exchange-traded stock covered by Regulation NMS. Therefore, the regulations described above do not apply, so market makers are free to enter stub quotes for this stock.

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  • ,this is a GREAT answer! Thanks for being so thorough!
    – RiverNet
    Apr 23 at 0:03
  • There's one problem with this answer: market makers for OTC stocks have no obligation to maintain continuous two-sided markets. There is no rule that prevents the market maker from cancelling the quote. Perhaps TomTom's answer is correct: the stub quote exists because of quirks in the market maker's in-house software.
    – Flux
    Apr 23 at 1:17
  • just because they are not required to does not mean they do not. When I worked in investment banking, we specialized in otc stocks, and it wascommon to see this.
    – RiverNet
    Apr 23 at 1:18
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First, MM's are bound to provide quotes within specific parameters by contract. ONE of those parameters is time (95% of the time, i.e.).

Second, this could be just a bet (maybe someone sells market - it DOES happen, MM's often keep far away orders for cases like that) or.... a software issue (not able to handle a 0 price "properly" and thus providing a quote for the smallest possible price) - on the MM side.

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  • "this could be just a bet..." What does this mean? Who is betting? Betting on what?
    – Flux
    Oct 14 '20 at 7:33
  • Well, if the order ois from a market maker, grade school logic would tell you it is the market maker betting.
    – TomTom
    Oct 14 '20 at 7:36
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    What is the market maker betting on? Is the market maker worried that there is an upcoming large sell order will take out all the bids above it?
    – Flux
    Oct 14 '20 at 7:38
  • Exactly. And I know people who make quite some money with that - though at a lot of work (which can be automated).
    – TomTom
    Oct 14 '20 at 8:04
  • How does it work? Place a large sell order, take out all the bids, scare all the market participants, ... ??? ..., and profit? Could you explain the steps? Thank you.
    – Flux
    Oct 14 '20 at 8:12

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