The SEC has amended certain rules under Regulation National Market System (Reg NMS), the 2005 ruleset that modernized US stock markets and sought to ensure fairness and competition.

Let’s take a look.

Minimum tick size halved for certain stocks under Rule 612

A second minimum pricing increment has been introduced for the quoting of certain stocks under Rule 612. This “tick size” represents the bid-ask spread, or the difference between a security’s best buy and sell prices.

Lower bid-ask spreads are generally good for investors, because it diminishes their transaction costs.

However, lowering bid-ask spreads can also reduce incentives for market-makers to provide liquidity for transactions, because for them, lower spreads generally mean lower profits.   

Under Rule 612, the minimum tick size has been $.01 for stocks greater or equal to 1$ per share.

The amendment introduces a reduced tick size of $.005 for certain stocks. Whether the minimum tick size will be $.01 or $.005 will depend on a stock’s Time Weighted Exchange Average Quoted Spread (TWS).

This refers to the average difference between the best bid and the best ask over a fixed period of analysis, with additional weight applied for the longer a stock lingered at a certain spread.

If the TWS is over $0.015, the minimum tick will be $0.01. If the TQAS is under $0.015, the minimum tick size will be $0.05.

This bifurcated model was eventually chosen by the SEC over a fixed minimum tick size of $0.015

The SEC stated in its original rule proposal that it “expects lower transaction costs primarily because the proposed tiered tick size regime would help mitigate the impact of some mechanical impediments currently preventing the market from realizing otherwise more competitive bid and ask prices.”

“The one-penny minimum has become outdated and too wide for many stocks in today’s markets … [I]n 2023 approximately 74% of share volume is being quoted at less than 1.5 pennies” said SEC Chair Gary Gensler.

Access fees reduced under Rule 610

The amendments also reduce the access fee caps for protected quotations. Protected quotations represent the best bid and ask prices across all trading centers, and Reg NMS ensures that prohibitively high fees are not implemented.

The SEC stated that Rule 610 will be updated to account for changes in Rule 612. For stocks priced at $1.00 or more, the access fee will be capped at $0.001 (1 mill) per share, down from $0.003 (3 mills) per share under the old rule.

For stocks priced less than $1.00, the access fee cap will be 0.1 percent of the quotation price per share.

Round lot and odd lot requirements accelerated

The rule will also accelerate the implementation of odd lot informational requirements and round lot definitions originally adopted in 2020, but whose implementation was delayed.  

This includes listing information about the best odd-lot orders to buy and sell. The SEC noted in its proposal that odd lot trades make up an increasingly important part of the market. However, only round lot quotes are currently disseminated as part of NMS data.

The definition of round lots, previously 100 shares, will be revised. Gensler stated this change was critical because only orders in round lots are given protection under the Order Protection Rule of 2005. The definition of round lots will be expanded to four tiers: 100, 40, 10, or 1 share.

Deadlines

The amendments will become effective 60 days after their publication in the Federal Register. For Rule 612, Rule 610, and the round lot definition, the compliance date will be the first business day of November 2025. The compliance date for odd-lot information will be the first business day of May 2026.  

Commissioners react

The amendments received vigorous endorsements from Commissioners Gensler and Lizárraga.

Commissioners Uyeda and Peirce raised some concerns regarding whether setting access fee caps would ultimately create sufficient beneficial effects for traders and the economy.

“Despite the comments, it is difficult to determine ex ante whether traders will enjoy lower overall transactions costs in light of [the change to access fee caps].” Uyeda said.

“It remains to be seen whether [the caps] will be enough,” said Commissioner Crenshaw.

All commissioners ultimately supported the final version of the rules changes.