Statement on Minimum Price Increments, Access Fee Caps, Round Lots, and Odd-Lots
Dec. 14, 2022
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. The last time that we updated many key aspects of our national market system rules, however, was 17 years ago, in 2005.
A great deal has changed since then: technologies, markets, and business models continually have evolved. 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. As of September 2022, as much as 42 percent of share volume is executed off-exchange. 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. 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 Established in 2005, the one-penny minimum increment used for quoting is outdated, and too wide for today’s markets.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. 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. 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.
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. 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. 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. 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.
 See Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249. Five objectives laid out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1): (1) economically efficient execution of securities transactions; (2) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (3) the availability to brokers, dealers, and investors of information with respect to quotations and transactions in securities; (4) the practicability of brokers executing investors’ orders in the best market; and (5) an opportunity, consistent with efficiency and best execution, for investors’ orders to be executed without the participation of a dealer.
 See Gary Gensler, “‘Market Structure and the Retail Investor:’ Remarks Before the Piper Sandler Global Exchange Conference” (June 8, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-global-exchange-conference-060822.
 See Gary Gensler, “‘Competition and the Two SECs’: Remarks Before the SIFMA Annual Meeting” (Oct. 24, 2022), available at https://www.sec.gov/news/speech/gensler-sifma-speech-102422.
 From release: “As of September 2022, on-exchange volume is approximately 58% while off-exchange/OTC volume is approximately 42%, while in 2007, on-exchange share volume was 71% and off-exchange/OTC volume was approximately 29%.”
 Sub-penny trading on exchanges and ATSs occurs pursuant to either midpoint or volume-weighted executions or exemptions granted by the Commission under rule 612(c) for retail liquidity programs.
 Currently, rule 612 establishes two minimum pricing increments—$0.01 for quotes and orders priced at or greater than $1.00 per share and $0.0001 for quotes and orders priced less than $1.00 per share.
 Per the release, an estimated 81.9% by share volume and 60.2% by dollar volume would go to sub-penny.
 The number of shares traded on average each day on exchange is more than 35 percent higher than it was a decade ago. See Cboe Global Markets https://www.cboe.com/us/equities/market_statistics/historical_market_volume/.
 See Merriam-Webster, “Round Lot,” which places the first known use of round lot circa 1902, available at https://www.merriam-webster.com/dictionary/round%20lot. See also DeCoppet & Doremus, “Buying and Selling Odd-Lots” (1933), available at https://www.bullmarketgifts.com/Buying-and-Selling-Odd-Lots-1933-p/od326.htm. As the bookseller explains, “This booklet was published in 1933 by DeCoppet & Doremus, who were Odd-Lot Dealers on the New York Stock Exchange and member of the Exchange. At the time, shares on the NYSE were traded in multiples of 100, known as ‘Round-Lots.’”
 See “SEC Adopts Rules to Modernize Key Market Infrastructure Responsible for Collecting, Consolidating, and Disseminating Equity Market Data” (Dec. 9, 2020), available at https://www.sec.gov/news/press-release/2020-311.
 See, e.g., the release at FN 363: “More recently, in June 2022, the daily exchange odd-lot rate for all corporate stocks averaged 65% and reached almost 41% for all ETPs in the same period. Exchange odd-lot volume as a proportion of total exchange-traded volume also rose in June 2022, reaching approximately 19% for all corporate stocks (and over 39% for the top decile by price) and approximately 7% for all ETPs. These levels are higher than the levels observed in the data from 2018 and 2019. See MDI Proposing Release, supra note 32, at 16739; MIDAS, available at https://www.sec.gov/marketstructure/midas.html.”