Statement on Amendments to Tick Sizes, Access Fees, and Transparency of Better Priced Orders

I think it is fair to say that equity market structure contains multitudes,[1] and in that poetic spirit today the Commission will vote on amendments that can be broken into several components: (1) reducing the tick size for certain stocks, (2) reducing the maximum fees that exchanges may charge investors for execution against protected quotations (or “access fee caps” for short); and (3) requiring exchange fees and rebates to be determinable at the time of the execution.[2] In addition, today’s amendments will accelerate the implementation of the “round lot” and “odd-lot information” definitions from the Market Data Infrastructure Rule[3] and add a new “best odd-lot order” data element (or “BOLO”) as part of the odd-lot information definition.

As I noted during the proposal phase, many market participants have suggested that trading in tick-constrained stocks would benefit from a smaller minimum tick size, though the specifics of the suggestions have varied.[4] In addition, data analysis has shown that it would be easier and less costly for investors to transact in these stocks if they were allowed to quote at increments smaller than one penny.[5] Today’s amendment addresses this issue by adding a new tick size of a half-penny for these stocks. This will benefit investors and market participants by allowing such stocks to be priced more efficiently and competitively.

The second component of the amendments will reduce the access fee caps for certain NMS stocks. Currently, many exchanges charge the maximum fee and then pay out nearly all of it as a rebate to compensate liquidity providers.[6] Though the exchanges retain a small amount for themselves, this practice distorts the price that is actually available to investors.[7] Therefore today’s amendment, which reduces the access fee, will allow exchanges to retain that same net capture for executions they were already keeping and continue to use rebates.[8] Reducing the distortions in the market associated with the fee/rebate models that have developed under the higher access fee cap should help improve market quality and preserve the integrity of displayed prices, which will reduce costs for investors.[9] It remains to be seen whether it will be helpful enough.

The third component of the amendments will require exchange fees and rebates to be determinable at the time of execution. In recent years, the exchanges have developed complex fee and rebate schedules, many of which include tiers or other incentives based on a broker-dealer’s trading volume.[10] One of the issues with this model is that because the fees are calculated based on monthly volume, broker-dealers and their customers do not know what the fees are until after the month’s end.[11] I think we can all agree that it is preferable to know what you’re paying up front. Here, customers’ lack of timely information and certainty about their fees and rebates can impact their choices. The amendments will provide much needed transparency.

Finally, the last part of today’s amendments will accelerate and build upon certain common-sense changes that the Commission adopted in the Market Data Infrastructure Rule. This aspect of the amendments will improve information available to investors and other market participants about better prices available in the market, resulting in more transparent pricing.

Thank you again to the staff of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of the General Counsel for all their hard work on this release. These amendments are an important step forward and I’m pleased to support them.