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A few days ago (June 1 and 2, 2010), US stock markets had some unusually large and rapid price drops. Some called it a meltdown. There has been a recovery of prices since then, but one of those rapid drops had a notable result.

Executed trades were negated after the fact.

Why would an executed trade be reversed? How could that happen?

Market rules allow for invalidating and reversing executed orders if they are determined to be erroneous.

In turbulent market conditions some major traders may simply shut down and stop trading.

However, there are market makers and specialists required to maintain bid and ask quotes on securities that they deal with. If they do not place bid and ask prices, they are not really market makers or specialists.

A major purpose of market makers and specialists is to maintain liquidity in trading shares, to keep the markets moving.

During the recent market shake out, there were apparently some shares that traded at 1 cent a share. This might have happened due to something called a "stub quote".

Imagine a lazy market maker, or specialist. Imagine they trade shares in XZQ. They must constantly maintain a bid price in order to be market makers. If XZQ is trading at $50 they might place a permanent stub bid of 1 cent. Usually there will be other bids out there, so no one expects a $50 share to suddenly trade at 1 cent-- or do they?

Apparently that might be what happened, and the NYSE and NASDAQ markets' exchange rules allowed some trades to be negated, after they were executed that day.

There are lessons in this. One lesson is to avoid making market orders when things look turbulent, or ever. Watching the Volatility Index (VIX) may give clues. The S&P 500 VIX spiked on the same days (June 1 & 2).

Another interesting idea might be to place one's own "stubs" into the markets. There could be reasons an individual would be prevented from placing their own silly orders, but I don't know of any. Say... use your computer to place bids at 10 cents, good until canceled, on every share in the market. Perhaps filter off ones that don't look good. Then, sit and wait for a market melt-down, when no one else is willing to trade, and your orders are way ahead of the 1 cent stub quotes, and might be among the most "decent" bids out there. Pick up shares at a dime, and some of them may double to twenty cents, or triple, or maybe that company goes out of business. The fact that the trades can be canceled needs to be taken into account. Is this too weird?

Maybe it would be better to run a program that figures in a little reality, such as P/E, ROI, ROIC, etc., and come up with a "more suitable" bid amount, that would be more difficult to be canceled.

I hope someone here, who knows more, will contact me with other information, including why these ideas may be wrong. I will note now there may be moral issues, heh. Any ideas received will likely update this end text.

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