John Ramsay, chief market policy officer at US equities exchange IEX, said the firm has a high level of confidence that the Securities and Exchange Commission will make changes to regulations related to tick size and access fees before the election in November.

In December 2022 the SEC released four proposals to reform US equity market structure and only one has been adopted.

In March this year the SEC adopted final rule amendments for mandated disclosures under Rule 605 of Regulation NMS for order executions in national market system stocks. Regulation NMS was adopted in 2005 to set the basic “rules of the road” for how equities trade.

The other three outstanding proposals relate to tick size/access fees; best execution and order competition. The latter involves exposing certain retail trade orders to new auction mechanisms and has been the most controversial, so Ramsey said the working assumption is that the SEC will not go forward with this proposal.

Ramsey expects the pieces of the reform that comprise changes to Reg NMS, such as tick size and access fees, will happen before the election. He told Markets Media: ” I think the odds that something won’t be adopted before November are very low.”

Tick size

“Tick size and access fees are somewhat related, and are very important in creating the rules of the road for equity trading, but there are independent reasons to update each one,” Ramsay added.

Tick size limits the ability of exchanges to compete, according to Ramsay, and creates a lot of the complexity around exchange fees as participants have come up with convoluted ways of getting around it. Therefore, creating increments where people want to transact allows trading to be more efficient.

Ramsay described the SEC’s tick size proposal as far-reaching and much more granular than most people assumed. The regulator has proposed the current standard of a one cent minimum tick for all stocks that are priced at one dollar or more should be reduced to one-tenth of a cent, two-tenths of a cent, and half a cent. Ramsay said a minimum tick size of a half-cent has a high chance of happening because the comments have been overwhelmingly in favor.

Ramsay also testified before the U.S. House Financial Services Committee at a hearing in June this year and said that the proportion of quoting in high volume stocks that occurs at prices that consistently run up against the minimum increment of one cent has grown enormously. Today, trading in such “tick- constrained” stocks accounts for a clear majority of all share volume.

Kevin Kennedy, executive vice president at Nasdaq, represented the Equity Markets Association before U.S. House Financial Services Committee and said that Nasdaq, along with the vast majority of the industry, suggests that the SEC adds one tick size at $0.005 to help tick-constrained securities trade more naturally.

“Beyond lower-priced tick-constrained securities, the SEC should also consider a wider tick size for higher-priced securities that currently trade with much wider spreads,” said Kennedy. “We also support harmonizing the minimum increment in which stock orders may be executed across all execution platforms, including both exchanges and non-exchanges.”

Access fees

Exchange access fees will certainly be reduced, and are likely to come down in a uniform way according to Ramsey. He added that if the cost to access exchanges becomes cheaper, it will help reduce some of the complexity around exchange pricing and the excessive use of rebates to attract order flow.

“We would like a set of rules where exchanges are competing on execution quality, as opposed to intricate pricing games,” added Ramsay. “We also think that it is important to halt the slide toward more dark trading, which hurts price discovery.”

In addition, he added that the multiplicity of pricing has led to fragmentation, which is why exchanges have a number of different order books and new rules could cause participants to consolidate their operations in a smaller number of venues.

Kennedy said Nasdaq strongly opposes the SEC’s  proposal to lower the cap far beyond what is needed to accommodate tick size reform.

“The Commission proposes to slash the access fee cap – more than 80% in some cases – as an implicit means of addressing ill-founded concerns about exchanges’ payment of rebates to market participants who send orders to Nasdaq,” added Kennedy. “Since access fees fund rebates, the proposal to reduce access fees would reduce exchanges’ ability to pay rebates.”

If the rules change Ramsay expects innovation of order types to continue, but the nature of the innovation may be a little different.

“Many order types over the last 10 years have evolved in response to the pricing system and to maximizing the ability to get a rebate, as opposed to trading at the best price,” he added.

Penny stocks

In July this year Virtu Financial petitioned the SEC to prohibit National Securities Exchanges from listing high risk “penny stocks” and to mandate additional disclosures from issuers that would facilitate investors’ ability to assess the risks typically inherent in such stocks.

Ramsay said IEX has read Virtu’s petition and thinks it is “great”as the recommendations make a lot of sense.

“Exchange-listed penny stocks have skyrocketed from a couple of dozen to around 500 and they are not coming off,” Ramsay added. “We do think that the SEC needs to take action in order to require the listing standards to be more strictly enforced.”

Excellent letter by @VirtuFinancial
calling for tighter SEC and stock exchange rules on penny stock listings. https://t.co/BV4gZebLjw https://t.co/MxuJRPBxG8

— Joe Saluzzi (@JoeSaluzzi) July 29, 2024