[thrownawayhft]

I worked at a market maker (owned by a bank) that handled around 8-10% of US stock trades. When things like the flash crash happened, the strategy was to stop anything automated, because the simple strategies had no way of knowing the cause. Trading on normal market-microstructure signals, the trading that provides the bulk of liquidity, would just get you creamed.

To meet our market maker requirements, which allowed us to do things normal market participants can't do, like naked shorting, we would do things like leave a 1 penny bid and ten-thousand dollar ask and not change them for the entire day. Exchange regulators tried to address this and made market makers quote within some percentage of the bid/ask. Nasdaq literally just created an order type that would automatically reprice itself to always be exactly that percentage away from the bid/ask, so that it could never execute--just like the previous 1-penny bids--but would comply with the regulation. The order type only existed to bypass that regulation and was literally created in response to demand after its passage.

Even without that order type we'd just do (and did do, it took them a while after the regulation to add the order type) the same thing in the models' trading logic.

[thejaredhooper]

Do you have any links/resources for the subject matter you're covering in this comment? I'd like to learn more about what you're saying, and I can't seem to wrap my head around what it is you're trying to express with penny bids.

[harryh]

What he's trying to say is that his firm was contractually required to have a bid (an offer to buy) and an ask (an offer to sell) for some set of stocks.

But under certain circumstances they didn't really like this requirement so they kind of cheated by changing their bid to 1 penny and their ask to $10,000. For a stock that trades around, say, $100 this means that while they de-facto had a bid and ask in place it wasn't really a real bid or ask as no one else would ever want to trade at those prices.

[thrownawayhft]

And under the regulation we might have been required to ask at minimum $120 for that stock when it was trading at $100. If the stock had a big day and rose to $200, Nasdaq would just raise our ask to $240, or whatever exact amount the regulation required. The only risk compared to the old way of doing things was that someone would hit the stock with a huge enough order to blow through all liquidity in one shot on the way up to our ask.