On September 18 2024, the SEC Commissioners unanimously voted 5-0 for the adoption of amendments to Regulation NMS. This follows years of review by the SEC of proposals to update Regulation NMS, which has not been substantially updated since its inception in 2005. Because these amendments will refine the “rules of the road” governing stock trading to match the needs of 21st century investors, they will make trading more efficient for investors and encourage the public display of liquidity on national securities exchanges.
This is also a promising example of productive collaboration between the industry and regulators, in that the adopted rules reflect multiple changes from the rules proposed in December 2022 based on feedback from many different groups of market participants. These are the following key changes the SEC adopted:
1) Tick Size Reduction: The minimum “tick size” for exchange quotes will be reduced to one-half cent for more actively traded stocks, which will allow those stocks to trade more efficiently and to be quoted at the prices where investors want to trade.
2) Access Fee Reduction: The top fee exchanges can charge to access their best-price quotations will be reduced from 30 mils to 10 mils ($0.0010 per share) for all stocks priced at one dollar a share or more which means that quoted prices will better reflect the true cost of trading and many investors will pay substantially less to access the best displayed prices.
3) Tiered Pricing Determinism: The amount of fees and rebates allocated to each trade will be known at the time of the trade, which will increase price transparency and make it easier for rebate payments to be passed back to investors.
4) Odd Lots and Round Lots: Consolidated data feeds will require disclosure of the best odd lot bid and offer prices, which will give investors better information about opportunities to receive better prices for share quantities less than the standard round lot sizes increase transparency and reflect the heavy influence of odd lot trading in today’s markets. Furthermore, the SEC also moved up the date for implementation of new round lot sizes that had been adopted several years ago.
Why are these changes needed?
The modernization of Reg NMS was one of four proposals put forward by the SEC almost two years ago. The changes to Regulation NMS are designed to “enhance trading opportunities for all investors”, and help keep pace with the significant technological advances and market changes that took place in the last two decades. Since 2005, the context and conditions within which markets operate evolved significantly, including:
• An explosion in volume and speed of trading (volumes have tripled and execution time has gone from seconds to microseconds).
• Substantial fragmentation in market venues from a few dominant exchanges to 16 exchanges and 30-plus ATSs. • A trend away from “lit” exchange trading to “dark” trading (dark venues now handle close to half of all volume).
• The costs to access exchange fees have stayed high, at the maximum rate allowed, which also leads to highly complicated fee and rebate schedules on most exchanges. This blog post goes into a more detailed analysis of how the amendments address these different factors.
Why does this matter to investors and the industry?
The reduced tick size will apply to all stocks with an average spread of less than 1.5 cents, which covers about 70% of all share volume today. The change to the tick size is critical because investors seek to be able to trade the most actively traded stocks at prices narrower than the minimum one cent increment the regulations allow today. That means exchanges often cannot take and display orders at the price levels at which investors want to trade. Reducing the tick size to one-half cent for these stocks means that quoted prices will better reflect true economic prices, and exchanges will be better able to compete among each other for orders in these securities.
Investors and others that want to access exchange prices generally are required to pay an access fee that is the maximum rate allowed by regulation. These high fees, pegged at this level by the regulation, stand in contrast to other measures of trading costs that have come down dramatically since Regulation NMS was first adopted. Reducing access fees means that quoted prices, including at the narrower tick increment, will better reflect the true cost of trading and will reduce the costs that investors bear. Throughout the comment process, as IEX has previously detailed, institutional investors overwhelmingly endorsed these targeted, common-sense updates to the rules that the Commission has now enacted.
In particular:
• Institutional investors with over $24T combined AUM supported a tick size reduction to one half-cent.
• Institutional investors representing over $25T combined AUM supported the change the SEC adopted in reducing the access fee cap to 10 mils. To read a deeper analysis of how the industry responded, check out this blog post.
What’s next?
Most of the rules are scheduled to be implemented in November of 2025.
Individual investors, both investing directly and through their advisers and managers, are the backbone of our capital markets. It is critical that the rules continue to stay up-to-date to serve their interests, and that the industry and regulators continue to listen to them in charting the course ahead. IEX will continue to advocate for ongoing review of the rules to make sure they stay up to date, reflect changes in how participants use the capital markets, and provide the best possible outcome for investors. U.S. markets are among the strongest and most efficient capital markets in the world precisely because regulators, investors, and the securities industry have always worked to improve them.
John Ramsay
Chief Market Policy Officer