SEC finalizes overhaul of stock pricing, exchange fee structure

The agency’s move Wednesday, which came with a unanimous vote from the five commissioners, might help trading venues such as the New York Stock Exchange and Nasdaq Inc., among others, better compete with wholesalers that can quote in finer increments outside of an exchange.

The changes could apply to about 2,400 securities, including stocks and exchange-traded funds, SEC officials said Tuesday during a press briefing. The number of so-called tick-constrained stocks affected by the new increments might change over time. Tick-constrained stocks include those with bid-offer spreads of less than a cent. 

“The one-penny minimum has become outdated,” SEC Chair Gary Gensler said during the agency’s meeting Wednesday. “The updates we’re considering today will help drive greater efficiency, competition and fairness in our equity markets.”

For years, market participants have complained that requiring exchanges to quote stocks at increments of at least 1 cent restricts liquidity and competition for order flow.  

The rules also lower the maximum amount of fees exchanges charge some brokers to access protected quotes on their platforms to $0.001 per share for stocks priced at $1 or more. Exchanges can charge higher fees, as much as 0.1% of the quotation price per share for stocks under $1. 

Those changes are largely in line with what the SEC first proposed in December 2022. Market participants have warned they may sue the agency over the lower access fee caps. Such fees help fund the rebates some exchanges offer brokers to entice order flow to their platforms. 

Currently, a significant chunk of retail trades are handled by wholesale brokerages like Virtu Financial Inc. and Citadel Securities, which pay to process customer trades from firms such as Robinhood Markets Inc.

The access fee caps help to ensure that market participants have fair access to the best displayed prices, the SEC said in a fact sheet.

The rule requires the total amount of exchange fees and rebates to be determined at the time of execution, rather than later, as they are now. That change would help address uncertainty on the cost of trading, Jessica Wachter, head of the SEC’s Division of Economic and Risk Analysis, said during Wednesday’s meeting.  

“The system was so complex that most investors didn’t know the rebates and fees resulting from their trading for days or weeks after the trades,” Tyler Gellasch, president and chief executive officer of the Healthy Markets Association, said in an email. “By making that information known at the time of the trade, brokers can make better routing decisions, and investors can negotiate to have those costs and profits passed through.”

Healthy Markets is a trade group that represents institutional investors including CalPERS and Federated Hermes and smaller exchanges like Miami International Holdings Inc. 

The rules are among a suite of market-structure overhauls proposed under Gensler’s tenure. The agency approved one measure earlier this year to require brokers to give better disclosure about the execution quality they offer traders. Two other measures proposed in the four-rule suite in December 2022 are still pending.

Fees, Rebates 

Large exchanges have said that lowering the fee caps could make it more costly for them to offer rebates to some brokers to lure trade orders to their platforms. 

Nasdaq hinted in a recent comment letter that it might sue the SEC, depending on how low it sets the fee caps. Nasdaq likened the agency’s moves over pricing to an attempt to regulate exchanges “like public utilities” and said the SEC would likely lose if the rule is challenged in court. 

Smaller exchanges like IEX Exchange, however, have supported the move and said the caps could help them compete for order flow with more established players.

“Several exchanges are already paying rebates that exceed the fees they collect on trades, so if the fees are reduced, the question remains about whether and how much the rebates will fall,” Gellasch said.

The rules will take effect 60 days after publication in the Federal Register. Compliance wouldn’t be required until November 2025 for most of the provisions.

(Updates throughout with SEC vote, comments and background.)