In an effort to encourage more competitive pricing and lower investor expenses, Wall Street’s top regulator on Wednesday introduced guidelines allowing stock exchanges to price shares in increments of half a penny instead of the existing minimum size of one cent.
At 10 a.m. ET (1400 GMT), the five-member U.S. Securities and Exchange Commission was scheduled to meet to cast a vote on the proposal, which was initially put forth in 2022 as a part of a larger set of market structure reforms. The pricing modifications were proposed by all of the commissioners, notwithstanding the SEC’s frequent political divisions.The rules apply to the extremely technical space in the multitrillion-dollar U.S. equities markets between the prices that stock sellers are ready to accept in a trade and what buyers are willing to pay, often known as the bid-ask spread.
According to the SEC, enabling prices to be quoted in increments, or “tick sizes,” of less than a penny will lead to narrower spreads, lower transaction costs, and more opportunity for aggressive pricing.
Up to 1,700 stocks would have been considered “tick confined” under the soon-to-be-adopted regulation, which would have required a weighted average of the spread to be 1.5 cents or less over a specific period of time, according to data from 2023, SEC officials informed reporters prior to the vote.
Industry, which had supported the half-penny increment and objected to sizes included in the 2022 proposal that were as small as a fifth or tenth of a cent, is likely to win because the SEC decided not to add pricing increments lower than half a cent.
According to market maker Citadel Securities, these tiny sizes pose a risk to diminish liquidity and exacerbate investor anxiety during stressful periods. Other industry players brought up issues like “queue jumping,” where buyers place bids that are only marginally higher than existing orders to get ahead of existing contracts.
The new regulations, which are up for voting on Wednesday, are scheduled to go into force in November 2025 if approved.
They are a part of a larger SEC initiative to enact the biggest market structure reforms in over two decades, which was prompted in part by the 2021 GameStop trading frenzy that caused significant losses for regular traders.
In an effort to lower default risk, the agency shortened the trading settlement cycle last year. This year, in March, it also introduced regulations mandating more extensive public reporting by broker-dealers and other entities on the caliber of transaction executions.
