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

Thank you, Chair Gensler. Today, the Commission is adopting a change in the required minimum pricing increments—also known as the “tick size”—for expressions of trading interests in national market system (NMS) stocks.[1] In addition, the Commission is reducing access fee caps and requiring more transparency of certain better priced orders. As the Commission observed when it originally adopted Regulation NMS, a minimum tick size can encourage the provision of liquidity by constraining the ability of market participants to gain an execution priority over pre-existing orders by providing an economically insignificant improvement in the bid or ask. However, if a tick size is too large, it can discourage price competition on national securities exchanges and cause market participants to seek out other venues that might lower transaction costs. Given that optimal tick size can depend on the characteristics of the market and the security being traded and may be affected by changes in technology and communications, the question of the required minimum pricing increment is one that should be revisited on a regular basis. It has been nearly 20 years since the Commission last did so. I am pleased that the Commission has now undertaken this effort.

The comment process regarding this proposal has allowed for substantive feedback from stakeholders and market participants to inform the final rule. One part of the proposal would have required minimum pricing increments on trade executions, in addition to requiring them on expressions of trading interest. This would have constituted a dramatic change in how NMS stocks are traded. Indeed, one significant concern expressed in the comments was that such a change might undermine price improvement opportunities for investors. This part of the proposal is not included in the final rule.

Another part of the proposal introduced four separate tick sizes, based on different ranges of “time weighted average quoted spreads.” Commenters raised concerns that this approach increased the complexity and potential cost. In the final rule, a more incremental approach is being adopted, with the Commission not moving forward on this highly complicated approach and instead adopting only one additional minimum pricing increment of a half-penny. The final rule contains a number of other adjustments, including a longer implementation period for market participants to make systems changes with respect to the increased transparency requirements for certain better priced orders.

Access fee caps, which place a ceiling on the fee for accessing a national best bid or offer, will be lowered. Despite the comments, it is difficult to determine ex ante whether traders will enjoy lower overall transactions costs in light of this change. Determining a specific cap for the access fee is not a simple proposition. I have concerns whether the Commission has selected the correct threshold. However, I have been assured by the staff, which is reflected in the release, that they will be studying the effects of this change and reporting back to the Commission.

The final rule accelerates the implementation of certain odd lot and round lot information in order to enhance transparency in the market. For the most part, these changes were already included in the final rule on Market Data Infrastructure, that was adopted by the Commission under the leadership of then-Chairman Jay Clayton on December 9, 2020.[2] While the availability of this information may, in some situations, require adjustments in broker-dealer business models to better serve investors, I have been advised by the staff that there is unlikely to be any substantial unintended consequences or costs regarding this change.

To conclude, this is an important rulemaking for our market structure. By its very nature, market structural issues are fraught with uncertainties when estimating the impact of regulatory changes. Across time, the Commission needs to continue to re-examine, and potentially re-calibrate, as to whether we have properly gauged these changes.

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.