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April 3, 2023

SEC Market Structure Reforms: Minimum Pricing Increments

Better Markets filed a comment letter with the Securities and Exchange Commission in response to the proposed rule on minimum pricing increments or “tick” sizes for stock trades, one of four proposed reforms to the structure of U.S. stock markets.  This proposal would (1) reduce the minimum pricing increments, or “tick sizes,” of certain eligible stocks; (2) reduce certain fees charged by exchanges; and (3) accelerate the transparency of the best-priced orders available in the market by revising its definition of “round-lots” and “odd-lots.”

Why It Matters.   Our securities markets have become increasingly unfair to everyday investors, and one reason is that the rulebook hasn’t kept up with the huge changes in the markets.  Those changes include  the rise of sophisticated trading firms that specialize in taking small increments of profit from everyday investors;  the increase in conflicts of interest that corrupt the duty of brokers to get the best possible prices for their clients; and the fragmentation of the markets into dozens of different trading venues, many of which are not transparent.  And one particular problem is that the minimum trade size established under a twenty-year old rule is now outdated with the advances in technology and the increase in trading volume.  As a result, investors aren’t able to trade in the increments that would enable them to get optimal prices.  In other words, although market forces appear willing and able to price certain stocks in increments of less than one penny, longstanding SEC rules prevent exchanges from displaying prices for most stocks in increments — or “ticks” — below a penny. This prevents bid-ask spreads from becoming narrower than one cent, meaning that traders may not be getting as good a deal as they should. Meanwhile, in off-exchange trading venues known as “dark markets,” sophisticated, highly resourced traders are freely able to make such sub-penny trades, affording them unique benefits denied to most ordinary investors.  The SEC’s proposal would help solve this problem by reducing the minimum tick size to less than a penny, improve the trading environment for retail investors, and level the playing field.

What We Said.  We strongly support the central thrust of the proposal, although we urge the SEC to strike a better balance and reduce tick sizes to a half-penny increment rather than a smaller tenth or two tenths of a cent. And by harmonizing sub-penny tick sizes among all trading venues, as proposed, all investors will be on a more even playing field and operating under the same rules in terms of the increments at which they can trade.  Better Markets similarly supports the Commission proposal to reduce access fees from the current level of $0.003 per share, or 30 mils, to $0.001 per share, or 10 mils. Technology and financial markets have evolved dramatically over the past two decades when Regulation NMS was first adopted. But our rules have not kept pace. The current access fee levels at $0.003 are long outdated and fail to correspond to any reasonable approximation of the relative costs incurred by exchanges. Updating these fees is a commonsense approach that will save investors money and increase market transparency. In the same vein, the SEC’s proposed revisions to the treatment of odd-lots and round-lots will provide important information to markets and investors, making trading more fair and efficient.

Bottom Line.  The SEC’s proposed amendments to the market structure rules are important and necessary reforms that will help level the playing field for the benefit of retail investors,  save investors their hard-earned money by reducing trading costs and improving market conditions, and produce a better informed, more transparent equities market. The SEC should proceed to finalize the proposal, with the enhancements we urge in our comment letter.

Read our full Comment Letter here or click the button below.

Comment Letters

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