Sec Speeches Cryptocurrency Statement on Minimum Price Increments, Access Fee Caps, Round Lots, and Odd-Lots

Today, the Commission will consider a proposal regarding the equity markets, relating to minimum price increments (also known as tick size), access fee caps, round lots, and odd-lots. I am pleased to support this proposal because, if adopted, it would enhance competition and help level the playing field across the equity markets, benefitting retail and institutional investors alike.

In 1975, Congress tasked the Securities and Exchange Commission with responsibility to facilitate the establishment of the national market system and enhance competition in the securities markets, including the equity markets.[1] The last time that we updated many key aspects of our national market system rules, however, was 17 years ago, in 2005.[2]

A great deal has changed since then: technologies, markets, and business models continually have evolved.[3] In particular, a large and growing amount of equity trading now goes into what many call the dark markets, particularly off-exchange market centers such as wholesalers and dark pools.[4] As of September 2022, as much as 42 percent of share volume is executed off-exchange.[5] Such off-exchange market centers, though, benefit from transacting using a different set of rules from the ones on national securities exchanges. This may undermine competition. Thus, I am glad to support today’s proposal to help drive greater efficiency, competition, and fairness in our equity markets.

First, the proposal would harmonize and adjust tick sizes to reflect today’s markets. In particular, the proposal would apply tick sizes consistently to both trading and quoting, regardless of trading venue. Currently, while minimum increments apply to quoting, they do not to trading, which may provide an advantage to dark markets.[6] In particular, off-exchange market centers, especially wholesalers, can execute trades at narrower increments—at the sub-penny level—than generally can be done in the lit markets. This may create a trading advantage for off-exchange market centers, such as wholesalers, which may limit competition. Harmonizing the tick sizes would help level the playing field between and amongst the dark and lit markets.

Further, the proposal would narrow the minimum tick size itself, making it smaller than a penny for many securities. Established in 2005, the one-penny minimum increment used for quoting is outdated, and too wide for today’s markets. Under the current “one-size-fits-all” system, the same tick size applies to all quoting, regardless of the price of the share.[7] Today’s proposal would replace this system with a tailored range of price increments, tiered according to the stock’s average spread. Under the proposal, many securities would have a tick size of half a penny.[8] If the stock’s average spread remains tick-constrained at that level, then the tick size would be further narrowed.

Second, the proposal would lower what exchanges may charge investors to access protected quotes. Current access fee caps, set in 2005, are outdated given that trading volume has increased significantly and technology has continued to evolve.[9]

Further, the proposal brings greater transparency to the access fees charged and related rebates paid by exchanges. In today’s markets, exchanges often rebate to one set of traders the access fees paid by another set of traders. This can create conflicts in the market. Such conflicts can benefit high-volume traders over smaller market participants and everyday investors. The proposal would ensure that traders can determine, at the time of executing a trade, the access fees charged and rebates paid by exchanges. Taken together, this transparency and change to access fee caps would drive efficiency, competition, and fairness in our markets.

Third, the proposal would bring more quotes into the National Best Bid and Offer (NBBO). The NBBO includes round lots, which are quotes for 100 shares. This definition for round lots, however, is at least 120 years old.[10] This definition no longer reflects today’s markets, particularly the high prices at which many stocks trade. This matters because, under current rules, only trades in round lots are covered by the Order Protection Rule. Further, it would bring more quotes into this important measuring stick, the NBBO, leading investors potentially to benefit from better pricing.

Accordingly, the proposal would implement a modernized, more-flexible definition for round lots. The Commission had put this new definition in place under the Market Data Infrastructure rules (the Infrastructure rules), and today’s proposal would accelerate the definition’s implementation.[11] Under this definition, a round lot’s size would be tiered according to the price of the share. This new definition would incorporate more relevant information into core data for quotes, including the NBBO.

Fourth, today’s proposal also would add to core data quotes on what’s known as odd-lots, which are orders smaller than a round lot. Odd-lots comprise a growing percentage of trades, particularly for retail investors.[12] The Commission also had adopted this change under the Infrastructure rules, and today’s proposal would accelerate the timing of its implementation. This would further enhance core data in our national market system, making quotes smaller than a round lot more widely available to the market. Together, these changes related to round lots and odd-lots would make share prices more fair and transparent.

Consistent with our mandate, guided by economic analysis, and shaped by public opinion, this proposal would enhance efficiency, competition, and fairness across our equity markets. That gets to the heart of our mission.

I’d like to thank members of the SEC staff who worked on this rule, including:

• Kelly Riley, Haoxiang Zhu, David Saltiel, Andrea Orr, Roni Bergoffen, Marilyn Parker, David Shillman, Eric Juzenas, Yue Ding, Jennifer Colihan, Will Miller, Steve Kuan, Marc McKayle, Johnna Dumler, Ted Uliassi, Arun Manoharan, Chris Ray, and Leah Drennan in the Division of Trading and Markets;
• Ariel Lohr, Peter Dixon, Jessica Wachter, Oliver Richard, Lauren Moore, Amy Edwards, Charles Woodworth, Jill Henderson, John Ritter, Yashar Barardehi, Rebecca Orban, Qiyu Liu, Paul Hughes, Patti Vegella, and Michael Davis in the Division of Economic and Risk Analysis;
• Dan Berkowitz, Megan Barbero, Meridith Mitchell, Malou Huth, Robert Teply, Janice Mitnick, Cynthia Ginsberg, Ronesha Butler, Tracey Hardin, Brooke Wagner, and Daniel Staroselsky in the Office of the General Counsel;
• Michael Hershaft in the Division of Examinations; and
• Mandy Sturmfelz in the Division of Enforcement.