On Wednesday, Wall Street’s primary regulator unanimously agreed to permit stock exchanges to set prices for numerous shares in increments of half a penny, instead of the current minimum of 1 cent. This initiative is intended to foster more competitive pricing and lessen investor expenses in the $55 trillion U.S. equities markets.
The updated regulation is expected to enhance the competitiveness of stock exchanges against off-exchange trading platforms, which account for nearly half of trading activity and can already propose smaller price increments, officials from the U.S. Securities and Exchange Commission indicated.
Following the vote from the commission’s five members, SEC Chair Gary Gensler stated that the new regulations would enhance transparency, fairness, and efficiency. “This aligns with the core mission of the SEC. These reforms are beneficial for investors. They foster capital formation,” he remarked in a statement.
This new rule represents a significant advancement in the SEC’s strategy to implement what might be the most critical market structure reforms in nearly two decades. Nevertheless, the SEC encounters challenges in election years that may impede the completion of all the changes introduced in 2022.
These rules are relevant to the intricate space between the prices at which stock sellers are prepared to sell and those that buyers are ready to pay, commonly referred to as the bid-ask spread.
Permitting price quotes in increments or “tick sizes” smaller than a penny is expected to narrow spreads, decrease transaction costs, and facilitate more competitive pricing, as stated by the SEC.
“In this industry, individuals will go to great lengths for mere basis points,” remarked James Angel, a Georgetown University McDonough School of Business professor, prior to the vote. “However, for everyday investors who occasionally buy and sell shares, they’re unlikely to see a marked difference.”
Before the vote, SEC officials informed reporters that data from 2023 indicated that around 1,700 stocks would meet the classification of “tick constrained” under the upcoming rule, meaning that the weighted average spread was 1.5 cents or lower over a specific timeframe.
The SEC’s choice not to incorporate pricing increments smaller than half a penny appears to be a victory for the industry, which had favored the half-penny increment while opposing the smaller sizes proposed in 2022 that were as little as a fifth or a tenth of a cent.
The changes enacted on Wednesday will additionally impose further restrictions on the fees that stock exchanges may collect for access to their platforms, effectively eliminating a portion of their revenue.
In a statement, Nasdaq mentioned it was still analyzing the rule but cautioned that it could lead to “serious harm” regarding the robustness of the stock markets over the long haul.
“Our preliminary assessment suggests that the commission’s rules seem shortsighted and fail to account for the complex dynamics of the equity market, overlooking the concerns voiced by various market participants,” it stated.
Conversely, Bryan Corbett, president of the Managed Funds Association, an investment industry lobbying group that has actively fought other SEC regulations during Gensler’s administration, praised the change, asserting in a statement that investors would gain from enhanced market liquidity, efficiency, and resilience.
In response to the initial proposal, market maker Citadel Securities strongly condemned the SEC’s market structure initiatives, claiming that tick sizes below half a penny would jeopardize liquidity and intensify investor panic during stressful periods. The company did not immediately provide comments on this matter.
Generally, market liquidity providers like Citadel would profit from broader tick sizes, according to Georgetown’s Angel.
The new regulations are set to come into effect in November 2025.
The SEC’s market structure reforms are partly a response to the GameStop trading surge of 2021, where retail investors incurred significant losses.
Last year, the agency reduced the trading settlement cycle to mitigate default risk and in March of this year implemented rules mandating increased public reporting on trade execution quality by broker-dealers and other entities.
