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Wall Street’s top regulator on Wednesday is set to adopt new rules for pricing stocks at less than a penny, part of a larger package of proposed reforms that could constitute the biggest overhaul of US equity markets in nearly 20 years if completed.
The US Securities and Exchange Commission rule change permitting stock exchanges to quote prices in sub-penny increments would promote more competitive pricing for the stocks now constituting the majority of trading volumes, according to the agency.
The five SEC commissioners are due to convene at 10 am ET (1400 GMT) to vote on the proposal first unveiled in December 2022. Though the SEC is often sharply divided on political lines, the commissioners unanimously proposed the pricing changes.
They will also consider a related change reducing the amount stock exchanges can charge for access to their markets, which officials say is necessary to prevent price distortions if price increments are reduced.
In announcing the proposal in 2022, SEC Chair Gary Gensler said the changes would help level the playing field between exchanges and dark markets.
Gensler has said disparities in on-exchange and off-exchange quotes, or “tick sizes”, has helped drive nearly half of all trades off exchanges. Smaller tick sizes are attractive to investors because they narrow the spread, thereby allowing a better deal.
The debate over the growth of off-exchange trading, long a hot topic in the US markets, was reignited by the 2021 GameStop (GME.N) trading fiasco, which highlighted the dominance of market makers like Citadel Securities in dark retail markets.
In public comments, Citadel Securities initially denounced the SEC’s reform proposals, arguing the tick sizes proposal threatened the stability and efficiency of markets by reducing liquidity and driving investor panic in times of turbulence.
Citadel and other firms including Charles Schwab (SCHW.N) and NYSE (ICE.N) have pushed for a minimum increment of half a penny, unlike the four-tiered system initially proposed by the SEC, which included increments of as little as a tenth of a penny.
Other industry participants said in comments that excessively small price increments risk promoting “queue jumping,” when buyers jump ahead of existing orders by making only fractionally higher bids, among other possible drawbacks.
The SEC has not yet disclosed the final version of the rule set to be adopted later on Wednesday.
Industry players have urged the SEC to proceed cautiously before finalizing the rest of its December 2022 market structure package, including a proposal to put stock orders up for auctions and a “best execution” standard for brokers and dealers in stocks and government bonds.
“They’re dealing with the less controversial ones first,” said James Angel, a professor at Georgetown University’s McDonough School of Business.