While the world was watching and waiting for the Fed to cut interest rates, the Securities and Exchange Commission (SEC) in a rare, quiet, bipartisan, and unanimous decision adopted “amendments to certain rules under Regulation NMS [National Market System]” that will allow U.S. stock exchanges to have transactions via increments of half a penny — a new minimum pricing increment or tick size.
To quote the very useful fact sheet, the SEC on Sept 18, 2024, adopted amendments to:
- “Establish a second minimum pricing increment, also known as tick size, of $0.005 under Rule 612 of Regulation NMS for the quoting of certain NMS stocks, which are stocks listed on a national securities exchange, regardless of trading venue;
- Reduce the access fee caps under Rule 610 of Regulation NMS and require national securities exchanges to make the amounts of all fees and rebates determinable at the time of execution; and
- Accelerate the implementation of the round lot and odd-lot information definitions adopted in 2020 under the Market Data Infrastructure Rules (‘MDI Rules’) and add information about the best odd-lot order to the definition of odd-lot information. An odd-lot order is an order for the purchase or sale of an NMS stock in an amount less than a round lot.”
The move is a milestone in the development of the NMS rules.
Gary Gensler
“In 1975, Congress tasked the Securities and Exchange Commission with [the] responsibility to facilitate the establishment of the national market system and enhance competition in the securities markets, including the equity markets,” says SEC Chair Gary Gensler, in a prepared statement.
“A lot has changed — in technology and business models — since we last took a comprehensive review of the national market system rules in 2005. Thus, it is incumbent upon us to update our national market system rules. The reforms we adopted today will help promote greater transparency, competition, fairness, and efficiency in our $55 trillion equity markets. That goes to the heart of the SEC’s mission. The reforms are pro-investors. They are pro-capital formation,” Gensler says.
While there was unanimous support, SEC Commissioner Hester M. Peirce, part of the loyal opposition to Gensler, had a few things to say.
Peirce says the rewritten version that became the final rule “is a significant improvement” over a prior version.
“It replaces an overly granular set of minimum pricing increments with a more reasonable single additional increment at a half-penny; it replaces a one-month review period for determining each security’s appropriate tick size with a more generous three-month review period and makes adjustments to the minimum tick size for each stock only twice a year, rather than once each quarter,” Peirce says.
“It abandons an ill-advised proposal to mandate minimum trading increments across exchange and off-exchange transactions. It provides a longer implementation period and commits the Commission to conducting a study of the rule’s effects and outlines how the Commission will determine whether the rule has achieved the Commission’s objectives,” Peirce says.
Hester Peirce
The changes in the revised version “should reduce operational complexity and potential investor confusion, allow tick-constrained stocks to trade at prices more closely approximating their natural levels, permit continued competition across exchange and non-exchange trading platforms, and lower investors’ costs of trading,” Peirce says.
But Peirce says that “the path we took to get here” makes her unhappy and she still has reservations about the proposal.
“Although the final rule is dramatically simpler than what we proposed nearly two years ago … we would have benefited from another round of comments and a public roundtable on a rule that more closely resembled the final rule we are considering today,” Peirce says. “Alternatively, the rule could have phased in its requirements over time to lower the risk of significant market disruption from making too many changes at once. Another step in the rulemaking process is painful, but making sure we get such a consequential rule right warrants a little pain.”
Let’s hope there’s no pain ahead because of the new rules.
The SEC notes that “amendments will become effective 60 days after the publication of the adopting release in the Federal Register. For Rule 612, Rule 610, and the round lot definition, the compliance date will be the first business day of November 2025. For odd-lot information, the compliance date will be the first business day of May 2026.”
The fact sheet can be found here: https://shorturl.at/cMWS7
The full text of the final rule can be found here: https://shorturl.at/6Cupo
Need a Reprint?