The U.S. Securities and Exchange Commission (SEC) has voted to reduce the minimum tick size for stock market trades to a halfpenny. This change is part of a larger package of reforms and represents the most significant overhaul of U.S. equity markets in nearly 20 years. SEC Chair Gary Gensler said the move would promote capital formation and unify the market under a national best bid and offer system.
The new rules will allow stock exchanges to quote prices in sub-penny increments, aiming to create more competitive stock pricing. Gensler noted that nearly half of all trades have moved off exchanges due to differences in on-exchange and off-exchange quotes.
Transaction volume in listed equities has tripled over the past 17 years. Stocks quoted at less than 1.5 pennies have grown from 54% in 2005 to 74% currently. Jessica Wachter, chief economist at the SEC’s Division of Economic and Risk Analysis (DERA), believes the changes will lower transaction costs for institutional and retail traders.
Sec reforms tick size rules
Extensive research went into these reforms. Comparing costs before and after implementation is expected to show significant benefits.
However, Commissioner Hester Peirce expressed skepticism about the reforms. She questioned what backup plans exist if the changes don’t work as intended or have adverse effects. Peirce emphasized the need for ongoing study and feedback from market participants, given the scale of the change.
Some industry players, such as Charles Schwab and Citadel Securities, initially opposed altering tick sizes. They argued that reducing liquidity and causing investor panic during turbulent times could threaten market stability and efficiency. The new rules are set to go into effect in November 2025.
This marks a significant shift in how stocks are priced and traded in the U.S. equity markets. The SEC and market participants will closely monitor the impact of these changes in the coming years.
