Statement on Proposed Rule Regarding Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders

Thank you, Chair Gensler.  The Commission is proposing variable minimum pricing increments for both the quoting and trading of national market system stocks, a reduction of access fee caps, and an improvement in the transparency of certain better priced orders.  Due to the technological changes since Regulation NMS was adopted, including the massively increased speeds and processing power used in electronic trading, the market standard known as “tick size” ought to be reconsidered.

For a national market system, having an established tick size—that is, a minimum pricing increment—for bids, asks, orders or other expressions of interest may make sense to encourage liquidity as it constrains the ability of market participants to gain an execution priority over pre-existing limit orders through an economically insignificant difference.  However, if an established tick size is too large, it may place an effective price floor on the provision of liquidity and preclude competition that may result in lower transaction costs for traders. Thus, it would appear that there is an optimal range for tick sizes.  Identifying that optimal range is a bit complicated from a regulatory perspective.  Indeed, the optimal range may be different depending on the technical characteristics and capacities of trading institutions as well as the characteristics of the securities being traded, including price.

Today’s national market system appears ripe for variable minimum pricing increments and a reduction in tick size in many circumstances.  The majority of current trading volume appears to be “tick constrained,” meaning that the effective spread cannot be reduced below one penny.  In other words, the tick size prevents competitive forces from further reducing quoted spreads.  At the same time, “there have been technological advancements that enable trading and order routing systems of market participants to handle the increased message traffic that could occur if smaller or varied minimum pricing increments were implemented for NMS stocks.”[1]  Thus, it is appropriate for the Commission to consider whether any regulatory changes are in the public interest.

One part of the proposal would extend the minimum tick size beyond a constraint on an order, bid, offer, or indication of interest to also limit the execution of trades.  However, the arguments for an optimal tick size for orders and other expressions of interest do not apply equally to execution improvements.  For example, a sub-optimally small tick size could discourage liquidity provision within orders by effectively eliminating time priority, but that same argument would not apply to improved execution.  In addition, one can imagine workarounds to improving an execution within a given tick size constraint by executing half of the transaction at a lower price and the other half at a tick size one step up.  While the proposing release contends “that requiring orders to be executed in the minimum pricing increment would enhance competition among trading centers by ensuring that all trading centers would be able to compete in the same price increment,”[2] it is not clear how important this supposed enhanced competitive effect would be, or precisely how practices might evolve to give effect to this enhanced competition.  Overall, the benefits of applying a minimum tick size to executions, as opposed to orders and expressions of interest, is less obvious, and I look forward to public comments on this point.

Another part of the proposal would reduce access fee caps.  While this change may make sense in the context of smaller tick sizes, the overall lowering of fees will likely result in a reduction of rebates, which could have unintended consequences and shift the competitive playing field in unpredictable ways.  I hope that the public does comment on this issue as well.

Overall, while I do not necessarily agree with all components of the proposal, the staff has done a good job in attempting to address the various concerns.  I am open to alternative ways to update these requirements and the subject matter deserves further exploration through the public comment process.  Thus, I will support the issuance of this proposal.  I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of General Counsel for their efforts.