TheCorporateCounsel.net

Yesterday, federal agencies were apparently big on cutting things by half a … something. I’m referring, of course, to the rate cuts, but also to the SEC announcing final amendments to the rules governing how exchanges quote individual stock prices, including by reducing the minimum pricing increment for ‘tick-constrained stocks’ (those with narrow bid-ask spreads) to half a penny. 

Here’s more from the 2-page fact sheet:

On September 18, 2024, the Securities and Exchange Commission adopted amendments to [e]stablish a second minimum pricing increment, also known as tick size, of $0.005 under Rule 612 of Regulation NMS for the quoting of certain NMS stocks, which are stocks listed on a national securities exchange, regardless of trading venue….

Minimum Pricing Increments. For quotations and orders in NMS stocks priced at or greater than $1.00 per share, the amendments to Rule 612 set forth two minimum pricing increments:

Minimum Pricing Increment If the Time Weighted Average Quoted Spread of the NMS stock during the Evaluation Period was $0.015 or less: $0.005

Minimum Pricing Increment If the Time Weighted Average Quoted Spread of the NMS stock during the Evaluation Period was Greater than $0.015: $0.01 …

[T]he compliance date will be the first business day of November 2025.

Here’s the explanation under “Why This Matters”:

When market participants submit orders to buy and sell shares of an NMS stock, the difference between the best buy order and the best sell order is the “bid-ask spread.” Rule 612 sets forth a minimum pricing increment of $0.01 for quotes and orders in NMS stocks priced at or greater than $1.00. This prevents bid-ask spreads for these stocks from being less than $0.01.

Since the adoption of Rule 612, there has been a marked increase in the trading volume of NMS stocks that would likely be priced with tighter spreads if their pricing was not constrained by Rule 612’s minimum pricing increment. In other words, easing constraints on ticks for these NMS stocks would allow for narrower spreads, reduce transaction costs for market participants, including investors, and allow prices to be determined in a more competitive manner.

Check out the reporting from the Wall Street Journal. And take a look at the fact sheet if you’re interested in the other changes related to access fees and transparency of better-priced orders.

– Meredith Ervine