SEC Updates Tick-Size and Access-Fee Rules, Industry Reacts

Retail and institutional investors will soon be able to trade in smaller increments on most U.S. stocks, as part of the SEC’s plan to overhaul equity market structure rules. 

On Sept. 18, the SEC’s five commissioners voted unanimously to adopt a second minimum pricing increment or tick-size in certain national market system (NMS) stocks that are not able to trade within the penny spread.  

The updated Rule 612 will establish a half-cent minimum increment (or $0.005) for quotations and orders in NMS stocks priced at or above $1.00, with a time weighted average quoted spread of 1.5 cents or less.  

“A lot has changed—in technology and business models—since we last took a comprehensive review of the national market system rules (Regulation NMS) in 2005,” said SEC Chair Gary Gensler. 

The reforms will retire a one-penny minimum penny quotation increment first adopted in 2005 under Regulation NMS, said Chair Gensler during the open meeting. Many NMS stocks would likely be priced more competitively if not constrained by a market-wide minimum pricing increment of $0.01, according to the SEC. 

 “I think it’s time to relax this limit on the market. “The one penny minimum has become outdated. It’s too wide for many stocks,” said Gensler. He noted that 74% or nearly three-quarters of share volume is being quoted at less than a 1.5 cents per share. 

“The reforms we adopted will help promote greater transparency, competition, fairness, and efficiency in our $55 trillion equity markets. That goes to the heart of the SEC’s mission. The reforms are pro-investors. They are pro-capital formation,” said Gensler. 

Access-Fee Cap & Other Changes

In line with reducing tick increments, the SEC adopted a rule to significantly cut the “access fee cap” – which relates to accessing the protected quotes of trading centers – from 30 mils (or $.003 per share) to 10 mils (or $.001 per share).   

This change will reduce the maximum transaction fee that exchanges can charge to access their best-bids-or-offers under Rule 610 of Reg NMS.  If stocks are priced less than $1.00, the access fee cap for protected quotations will be 0.1 percent of the quotation price per share. 

“Lowering the access-fee cap from three-tenths of a penny to one-tenth of a penny, together with the changes of the increment, will lower costs for investors,” said Gensler. 

Also, the SEC will require that all fees and rebates are determinable at the time of execution, which aims to improve transparency into transaction costs.  

These reforms, which take effect in November of 2025, are the second set of rules to be finalized as part of the SEC’s four equity market structure proposals released in December of 2022.  

The final rules will also implement the definitions for round lots and odd-lot information previously adopted in the 2020 Market Data Infrastructure Rule to provide transparency into better priced small orders. This requires existing securities industry processors (SIPs) will need to collect, gather and disseminate odd-lot quotations and identify the best odd-lot bids and offers by May of 2026. 

Khody Azmoon, Head of Business Development and Product Strategy at BLOX Markets, said: “We believe these changes will ultimately benefit the stock market as a whole and, importantly, the underlying retail investors through a combination of tighter spreads, lower exchange fees, and transparency around execution fees.” 

Industry Reactions to Lower Access-Fees

While investors will benefit from narrower spreads, revamping the plumbing of the stock market has many implications for brokers, exchanges and institutional traders, said some market experts. 

Larry Tabb, Head of Market Structure Research at Bloomberg Intelligence, wrote in a BI research brief, “Retail investors may win but others could lose in the SEC’s move to lower ticks-sizes to a half cent.  Cutting spreads and fees helps retail traders but hurts institutional investors’ trade-in size.” 

 “In addition, if the brokers pay lower-access fees, this will put downward pressure on commissions, market makers will feel their profit squeezed and exchanges will see top-line fees slashed by 67%.” 

Prior to the vote, Tabb thought that the SEC would settle at a 10-15 mil access fee cap, but he had heard rumors that exchanges think that will negatively impact displayed liquidity. “They could be right given most of the access fees are translated into tighter quotes.” 

Tabb said the current -30 /+28 (maker-taker model) gives a rebate to market makers so they can provide tighter quotes.  “If the rebate goes from 28 to 8, that is 20 mils less they can provide in their quotes, which then could widen the quote and send more flow off-exchange,” he said.  

However, the SEC said that higher access-fees distort prices for investors since the fees and rebates are not transparent in the quote, and they cause conflicts of interest in order routing practices for broker-dealers and their customers.  The high rebates contribute to complex fee schedules at exchanges, leading to more fragmentation, argued SEC officials, which makes it more expensive for market participants to design order execution strategies. 

Adapting to Change

Eric Stockland, Managing Director and Co-Head of Electronic trading at BMO Capital Markets, said: “The rule that will impact markets the most are changes to tick sizes and access fees, which is going to affect not only the mechanics of how stocks trade, but the behavior of algorithms themselves.”  

While the final rule is less granular than the initial rule, it creates two tiers with two minimum price increments – half cent and a penny for stocks priced $1.00 or more whose time weighted average spread is 1.5 cents or less. The tick size for each stock will be reviewed during a specified three-month evaluation period and then assigned for a six-month period. 

Stockland said firms will need to maintain a list of which stocks are now half-penny stocks and penny ticks and how often they move buckets.  “A name might go from being penny to half penny; or might go from half-penny to penny,” he explained. 

“Firms will need to write code to comprehend these different lists for tick sizes and fee structures,” said Stockland. In addition, sell-side algorithms will need to adapt to lower rebates and fee tiers on exchanges, which are based on volumes done in stocks. 

“We anticipate exchanges and possibly ATSs reworking their pricing structures in response to these new rules.”  As spreads shrink and access fees are reduced, algorithms will behave differently, he said. “Pragmatically, there is work to be done as the market copes and adapts.” 

Although the SEC did not provide a list of stocks that would be affected, according to The Wall Street Journal, about 1,700 securities (including stocks and exchange-traded funds) will qualify for the half-penny ticks based on how they traded last year, citing estimates from SEC officials.   

Speaking on the Bid Out podcast in April, Brett Redfearn, Founder and CEO at Panorama Financial Markets Advisory, said that most observers expected the markets would end up with a half-cent increment on the 1,000 most liquid names.  

However, Redfearn, who is the former Director of Trading & Markets at the SEC under Chair Jay Clayton, said there’s a concern the Commission will go wider and expand the list to 1,500 names, which he argued is, “too many names and they’re not going to be genuinely penny constrained.” If the list is too large, Redfearn suggested there’s risk of litigation against the SEC from firms over the methodology used to determine which stocks ought to have narrower tick increments. 

Litigation Risk

Market observers cautioned that the SEC could face litigation if it pushed through the tick- size and access-fee proposals along partisan lines with a 3-2 vote. However, the SEC passed the rules 5-0 along bipartisan lines with support from two Republican and three Democratic commissioners, which strengthens its position to withstand challenges. 

Commissioner Hester Peirce said she supported the final rule since it would “allow tick-constrained stocks to trade at prices [closer to] their natural levels, permit continued competition across exchange and non-exchange trading platforms, and lower investors’ costs of trading.” 

However, Peirce noted that market participants wanted a more incremental approach. She said several commentators requested a delay in implementing this rule until Rule 605 data is available, which the SEC adopted in March. 

It remains to be seen how the exchanges and market makers will react to the final rules. 

In a social media post on X, (formerly known as Twitter), Tabb wrote after the SEC voted: “We knew that they would move to 1/2 cent spread for more liquid stocks, but they are courting exchange ire with 10 mils. With a 10mil access fee, I think it’s a good probability that the exchanges and maybe market makers will sue.” 

What’s Next?

Meanwhile, the SEC is expected to turn to the other two outstanding proposals on best execution and the order competition rule (OCR), which have received limited attention and were considered too prescriptive and unnecessary.  

The industry has deemed the Best Execution rule too all-encompassing and duplicative with a FINRA rule, and the order competition rule would subject most retail orders to auctions at an” open competition center” before a wholesaler could execute them internally. 

On the podcast, Redfearn said, “We can just dispose of the order competition rule,” calling it unworkable, and added that he doesn’t think it could pass or it would die in litigation.” 

As for best execution, Redfearn said he expects the SEC to try to get something done, but said it had big problems to resolve. “The rule as initially proposed was overly prescriptive and will need to be dialed back.” 

Stockland thinks another possibility is that the Commission could approve a best execution standard that’s a “copycat version of FINRA’s rule,” and then broaden its scope over time. It’s known as a land-and-expand strategy, he said. “If the chair is at the end of his tenure and the staff wants to have a legacy of his accomplishments, this gets the best-ex rule on the books,” said Stockland.