SEC Adopts Amendments to Rules on Equity Trading
Commentary by Glen Barrentine
The SEC adopted rule amendments to National Market System regulations ("Regulation NMS") to establish minimum pricing increments (i.e. "tick sizes") for the quoting and trading of NMS stocks and to reduce the access fee caps for protected quotations of trading centers. (See also previous coverage.)
According to the accompanying Fact Sheet, the amendments:
- establish a second minimum pricing increment, also known as tick size, of $0.005 under Regulation NMS Rule 612 ("Minimum Pricing Increment") 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 Regulation NMS Rule 610 ("Access to Quotations"); and
- require national securities exchanges to make the amounts of all fees and rebates determinable at the time of execution.
The SEC said the reform would also
- accelerate the implementation of rules that will make information about the market's best priced, smaller-sized orders publicly available, specifically, the round lot and odd-lot information definitions adopted in 2020 under the Market Data Infrastructure Rules.
The amendments are effective 60 days after publication in the Federal Register.
Statements
- Chair Gary Gensler asserted that the reforms will lower costs for investors, improve liquidity and price efficiency and ensure the equity markets remain competitive and transparent in today's evolving landscape.
- Commissioner Jaime Lizárraga emphasized that the final rule will enhance price transparency and market quality. He said lowering access fee caps and adjusting stock price increments will eliminate conflicts of interest.
- Commissioner Mark T. Uyeda acknowledged concerns about the difficulty in determining the optimal access fee cap and supported the rule's incremental approach. He emphasized the need for ongoing evaluation of market structure issues, given the uncertainties involved in estimating the effects of such regulatory changes.
- Commissioner Caroline A. Crenshaw highlighted the importance of knowing fees upfront and stated that the reforms will help ensure more informed choices for market participants.
- Commissioner Hester M. Peirce praised the simplification of tick size increments and the extended review periods but expressed concern about procedural shortcuts.
Commentary
The new rule amends NMS Rule 612 ("Minimum Pricing Increment") to establish two minimum pricing increments consisting of (i) a minimum pricing increment of $0.005 for NMS stocks that have a "time weighted average quoted spread" ("TWAQS") during the immediately prior "evaluation period" of $0.015 or less and (ii) $0.01 for all other NMS stocks. The term "time weighted average quoted spread" means the average dollar value difference between the National Best Bid ("NBB") and National Best Offer ("NBO") during regular trading hours where each instance of a unique NBB and a unique NBO is weighted by the length of time that the quote prevailed at the NBB or NBO. The term "evaluation period" refers to the three months from January through March of a calendar year and the three months from July through September of a calendar year. In other words, the TWAQS for each NMS stock will be calculated over the three-month period of each evaluation period and then will apply for the next six months pending the completion of the next evaluation period.