The U.S. Securities and Exchange Commission (SEC) recently voted to implement the latest revision to U.S. securities regulations since the mid-2000s, a significant move aimed at leveling the playing field for small investors. These new regulations focus on two main areas: reducing tick sizes and reducing entry fees.
The SEC’s action signals a commitment to promoting fair and transparent trading, ultimately benefiting investors through increased competition for orders. This is expected to result in lower transaction costs and better value. Additionally, the changes are intended to create a level playing field between traditional clearing and the less regulated “dark pool” that has expanded as the economy has taken off.
The impact of these new rules on traders and exchanges will be significant and will be closely monitored until the law change comes into effect in November 2025.
What has the SEC approved?
Tick size reduction
The SEC has implemented a two-tiered system for minimum incremental costs, or “bids,” for securities. While some stocks will maintain their usual 1-cent price, thousands of other stocks (stocks with bid-ask spreads typically around 1 cent) will see their minimum costs increase to $0.005 or additional pennies. This is expected to affect 1,788 stocks as part of the market structure last year, according to SEC filings.
A tick represents a unit of measurement for changes in market price (up or down). It is a standard method used to track and compare exchange rates of different stocks or different prices for the same stock on different exchanges. Price movements also allow traders to optimize their trades, as they provide more accurate pricing and better trading performance.
Evolution of tick sizes in the US
For most of the 19th and 20th centuries, U.S. stocks were denominated in fractions of a dollar, so it’s significant that prices increase in increments of eight dollars (12.5 cents).
In 1997, the rise on major exchanges such as the New York Stock Exchange and the Nasdaq rose to sixteen cents (6.25 cents) per dollar, commonly referred to as “teens” by traders.
A major shift happened in 2001 when the SEC mandated that all stock markets switch to decimal pricing through what was called “decimalization.” This meant prices were now quoted in dollars and cents, making them easier to understand and compare. Since then, the standard tick size when trading stocks above $1 has been one cent.
What could this change bring?
Smaller tick sizes translate to narrower bid-ask spreads (the difference between buying and selling prices), directly reducing trading costs for investors. Tighter spreads mean less money is spent when buying or selling stocks, effectively boosting investor returns, especially for those making smaller trades.
Access fee cap reduction
The SEC is taking a hard look at the “maker-taker” fee structure prevalent in U.S. stock markets. In this model, exchanges incentivize market participants to provide liquidity (i.e., “make” the market) by offering them rebates, while those who take liquidity (i.e., execute trades against existing orders) are charged a fee.
Concerns have arisen that this system can be exploited by high-frequency traders, leading to potential market distortions,reduced liquidity, and ultimately, higher costs for long-term investors. The SEC is particularly scrutinizing the practice of exchanges offering sizable rebates, which critics argue can incentivize certain behaviors that are detrimental to overall market health.
To address these concerns, the SEC is slashing transaction fees. The maximum fee exchanges can charge brokers for executing trades has been drastically cut from 30 cents to 10 cents per 100 shares.
How can this change be achieved?
Lower costs directly translate to lower costs for investors, allowing them to keep more of their investment. By limiting creator-designer exploitation and increasing the cost of entry with new growth models, the SEC aims to further encourage fair and transparent business. Finally, increased regulation of transaction frequency and changes to entry fees can help reduce market risk and increase investor confidence.
