Sept 18 (Reuters) - Wall Street's top regulator on

Wednesday is set to adopt new rules for pricing stocks at less

than a penny, part of a larger package of proposed reforms that

could constitute the biggest overhaul of U.S. equity markets in

nearly 20 years if completed.

The U.S. Securities and Exchange Commission rule change

permitting stock exchanges to quote prices in sub-penny

increments would promote more competitive pricing for the stocks

now constituting the majority of trading volumes, according to

the agency.

The five SEC commissioners are due to convene at 10 a.m. ET

(1400 GMT) to vote on the proposal first unveiled in December

2022. Though the SEC is often sharply divided on political

lines, the commissioners unanimously proposed the pricing

changes.

They will also consider a related change reducing the amount

stock exchanges can charge for access to their markets, which

officials say is necessary to prevent price distortions if price

increments are reduced.

In announcing the proposal in 2022, SEC Chair Gary Gensler

said the changes would help level the playing field between

exchanges and dark markets.

Gensler has said disparities in on-exchange and off-exchange

quotes, or "tick sizes", has helped drive nearly half of all

trades off exchanges. Smaller tick sizes are attractive to

investors because they narrow the spread, thereby allowing a

better deal.

The debate over the growth of off-exchange trading, long

a hot topic in the U.S. markets, was reignited by the 2021

GameStop ( GME ) trading fiasco, which highlighted the dominance

of market makers like Citadel Securities in dark retail markets.

In public comments, Citadel Securities initially denounced

the SEC's reform proposals, arguing the tick sizes proposal

threatened the stability and efficiency of markets by reducing

liquidity and driving investor panic in times of turbulence.

Citadel and other firms including Charles Schwab ( SCHW )

and NYSE have pushed for a minimum increment of

half a penny, unlike the four-tiered system initially proposed

by the SEC, which included increments of as little as a tenth of

a penny.

Other industry participants said in comments that

excessively small price increments risk promoting "queue

jumping," when buyers jump ahead of existing orders by making

only fractionally higher bids, among other possible drawbacks.

The SEC has not yet disclosed the final version of the rule

set to be adopted later on Wednesday.

Industry players have urged the SEC to proceed cautiously

before finalizing the rest of its December 2022 market structure

package, including a proposal to put stock orders up for

auctions and a "best execution" standard for brokers and dealers

in stocks and government bonds.

"They're dealing with the less controversial ones first,"

said James Angel, a professor at Georgetown University's

McDonough School of Business.