Sept 18 (Reuters) - Wall Street's top regulator on
Wednesday unanimously voted to allow stock exchanges to price
many stocks in increments of half a penny, rather than the
current minimum size of 1 cent, aiming to promote more
competitive pricing and reduce investor costs on the $55
trillion U.S. 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 U.S. Securities and Exchange
Commission.
"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outdated.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.
"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
favored 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 ( GME ) 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.