The U.S. Securities and Exchange Commission (SEC) has unanimously approved new rules that adjust how stocks are priced and traded.
These changes, though less ambitious than SEC Chair Gary Gensler's original proposals, could still impact revenue for major stock exchanges like Nasdaq and the Intercontinental Exchange, which operates the New York Stock Exchange. Despite their opposition, the new regulations aim to enhance market efficiency and reduce costs for investors.
One significant change is the reduction in stock price increments from one penny to half a cent for certain high-volume stocks. This narrower spread, known as "ticks," will apply to stocks priced above $1, potentially increasing liquidity in these stocks by allowing more competitive bidding. The rule targets the 1,750 stocks identified by SEC economists as being constrained by the current penny increment, particularly those with high trading volumes. Stock eligibility for the half-cent increment will be reassessed twice a year, depending on trading activity.
Though this rule affects stock price quotes, it doesn’t alter the actual trading prices. Another notable rule lowers the fees and rebates exchanges pay to encourage trading in less liquid stocks. Currently capped at 30 hundredths of a cent per share, the fees and rebates will now be limited to 10 hundredths. This change could disrupt the competitive dynamics among exchanges like Nasdaq, which rely heavily on rebates to attract liquidity providers.
Nasdaq, in a written statement, criticized the new rules, claiming they overlook the complexities of the equity market and could harm both the National Best Bid and Offer system and the overall strength of the U.S. equity market. The exchange operator warned that the rules could ultimately raise costs for both investors and companies.
However, buyside investors, particularly hedge funds, have shown support for the changes. The Managed Funds Association, representing hedge funds, praised the move to half-penny tick sizes, stating it would improve market liquidity, efficiency, and reduce costs for participants.
The unanimous vote, which included support from Republican SEC commissioners Hester Peirce and Mark Uyeda, signals the moderate nature of these reforms compared to Gensler’s original vision. In 2022, the SEC chair proposed more aggressive measures to overhaul U.S. stock trading, including ending payments by off-exchange market makers like Citadel Securities and Virtu Financial to stockbrokers for retail customer orders. He also sought to shift more trading volume from "unlit" venues back to exchanges and strengthen brokers' obligations to secure the best price for their clients. These ideas sparked significant opposition and were ultimately scaled back.
With the 2024 presidential election approaching, Gensler’s time at the helm of the SEC may be limited, making these latest reforms one of his final chances to reshape Wall Street’s rules. Gensler, reflecting on the commission’s vote, declared it a victory for investors and the U.S. equity markets.
