WALL Street’s top regulator on Wednesday (Sep 18) unanimously voted to allow stock exchanges to price many stocks in increments of half a penny, rather than the current minimum size of one cent, aiming to promote more competitive pricing and reduce investor costs on the US$55 trillion US equities markets.
The new rule should also help stock exchanges compete with off-exchange trading venues, which represent nearly half of trading volume, according to the US Securities and Exchange Commission (SEC).
“This will lower costs for investors as well as improve liquidity, competition and price efficiency in the markets,” SEC chair Gary Gensler said. “The one-penny minimum has become outdated. It’s too wide in many stocks.”
The new rule from the five-member SEC marks another step in the agency’s plans to adopt what would be the most important market structure reforms in nearly 20 years. However the SEC faces election-year headwinds in completing the changes unveiled in 2022.
The rules apply to the highly technical space between prices stock sellers are willing to accept in a trade and what buyers are willing to pay, known as the bid-ask spread.
Allowing prices to be quoted in increments, or “tick sizes,” of less than a penny will result in narrower spreads, cutting transaction costs and allowing for more aggressive pricing, according to the SEC.
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“This is an industry where people will sell their grandmothers for four basis points,” James Angel, a professor at Georgetown University’s McDonough School of Business, said ahead of the vote. “But for the retail investor who buys and sells a share here and there, they’re not gonna notice a difference.”
Prior to the vote, SEC officials told reporters that 2023 data showed that as many as 1,700 stocks would have qualified as “tick constrained” under the rule due to be adopted, meaning a weighted average of the spread was 1.5 cents or less over a certain period.
The SEC’s decision not to include pricing increments smaller than half a cent represents a likely win for industry, which had favoured the half-penny increment and objected to sizes included in the 2022 proposal that were as small as a fifth or a tenth of a cent.
Market maker Citadel Securities said such small sizes threatened to reduce liquidity and worsen investor panic in times of stress. Other industry participants pointed to problems such as “queue jumping,” in which buyers jump ahead of existing orders by placing bids that are only fractionally higher.
The new rules are due to take effect in November 2025.
They SEC’s market structure reforms are in part driven by the GameStop trading frenzy of 2021, in which retail traders suffered substantial losses.
The agency last year shortened the trading settlement cycle to help reduce default risk and in March of this year adopted rules requiring expanded public reporting on the quality of trade executions by broker-dealers and others. REUTERS
