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US regulators dumped long-standing penny limits on share trading prices and cut the fees exchanges can charge their users in new equity market rules that nonetheless ended far short of more radical initial plans.
Wednesday’s changes are the second piece of a broader four-part shake-up of US stock trading first proposed in December 2022 by the Securities and Exchange Commission. Combined, the plans represent the biggest changes to the stock market’s structure in 20 years. They have been one key element in the ambitious reform agenda pursued by SEC chair Gary Gensler.
The SEC’s five commissioners voted unanimously to reduce the so-called “tick size”, or spread, between buy and sell prices to a half-cent from a full penny for stocks that met certain liquidity criteria. The watchdog also slashed the access fees that users pay exchanges by two-thirds.
The gap between buy and sell prices will reduce trading costs for investors but potentially hurt brokers including big banks and high-frequency trading firms, which can profit from those gaps. However, any hit for market-makers would at least be partially offset by the big cut in access fees also introduced on Wednesday.
The rules, which will take effect in November 2025, are designed to help level the playing field between exchanges and other more lightly-regulated “dark pools” which have boomed with the growth of electronic trading. At the meeting, Gensler said the new rules would “help promote greater transparency, competition, fairness and efficiency in our $5tn equity markets”.
The moderation in the final rules marks the latest climbdown by the SEC from initial plans following pushback by industry participants. Others that have been softened from more ambitious beginnings include new climate data reporting requirements for companies, expanding the definition of a dealer in the Treasury market, and the extent of short-selling disclosures.
Despite the softening, the SEC is still facing court challenges on each of those rules.
Emboldened by higher courts’ readiness to curb regulators’ rulemaking powers, market participants, trade associations and others have filed lawsuits targeting key pillars of Gensler’s reform agenda. Some have succeeded in throwing out or halting the implementation of new SEC regulation.
Hester Peirce, a Republican commissioner, supported the new rules, which she considered a significant improvement from the initial proposals. However, she characterised those as having been “needlessly complicated”.
Tick size began to narrow in the US stock market in the late 1990s. Originally priced in one-eighths of a dollar, they were reduced to a penny in 2000 as equity markets switched to decimal-based pricing, which until Wednesday also served as the minimum spread allowed.
Initially the SEC had proposed a four-tier system that would have reduced spreads of some stocks to tenths of a penny. But a broad coalition of industry participants warned it risked reducing liquidity by slicing prices too finely.
Asked after the meeting whether he expected legal challenges on Wednesday’s rule changes, Gensler said he was “quite confident this is within the law and how the courts interpret the law”.
Wednesday’s decision to reduce tick sizes will probably have the biggest impact in trading of highly liquid stocks where there is enough volume to price shares in fractions of a penny. Under the new rules, SEC staff estimate some 1,700 securities would have qualified last year for the new narrower trading band, representing 43 per cent of all trading by value.
Access fees are what brokers pay exchanges to obtain the quotes they post. Exchanges in turn rebate a portion of fees depending on how actively a broker places buy and sell orders — a system requiring regular complex updates to traders’ software systems. The difference between the fee and the rebate is revenue for an exchange.
The SEC on Wednesday also mandated that exchanges must make trade pricing, including all fees and rebates, clear before trading — meaning those must be based on previous trading volumes, not based on month-end assessments as is done now. SEC staff said the changes would improve transparency around trading costs.
Additional reporting by Stefania Palma in Washington