The Securities and Exchange Commission (SEC) of the United States has made a decision to lower the minimum tick size for trading stocks to a half-penny. This modification is part of an extensive set of reforms and stands as the most major transformation of U.S. equity markets in almost two decades. According to SEC Chair Gary Gensler, this action is intended to encourage capital formation and standardize the market through a national best bid and offer system.
The updated regulations will permit stock exchanges to display prices in sub-penny increments, with the goal of fostering more competitive stock pricing. Gensler mentioned that almost 50% of trades have shifted away from exchanges because of disparities between on-exchange and off-exchange pricing.
Over the last 17 years, the transaction volume in listed equities has increased threefold. The share of stocks priced under 1.5 pennies has risen from 54% in 2005 to 74% today. Jessica Wachter, the chief economist at the SEC’s Division of Economic and Risk Analysis (DERA), contends that these adjustments will help to decrease transaction costs for both institutional and retail traders.
SEC reforms tick size regulations
Extensive analysis has supported these reforms. A comparison of costs before and after the changes is anticipated to reveal substantial advantages.
Nevertheless, Commissioner Hester Peirce has voiced doubts regarding the reforms. She questioned what contingency plans are in place should the changes not achieve their intended goals or result in negative consequences. Peirce underscored the importance of continuous examination and input from market stakeholders, given the magnitude of the modification.
Some players in the industry, including Charles Schwab and Citadel Securities, initially resisted adjustments to tick sizes. They cautioned that a reduction in liquidity and the potential for investor anxiety during volatile periods could jeopardize market stability and efficiency. The revised rules are scheduled to be implemented in November 2025.
This represents a notable transition in the manner stocks are priced and traded within the U.S. equity markets. The SEC and participants in the market will meticulously observe the ramifications of these modifications over the next few years.
