On September 18, 2024, the Securities Exchange Commission (“SEC”) unanimously adopted new rules amending Regulation NMS (the “Amendments”). The Amendments (1) establish new minimum pricing increments (or “tick sizes”) for certain stocks priced above $1.00, (2) establish a new maximum fee for access to quotations, and require that all such fees be calculable as of the transaction date, and (3) accelerate the implementation of operational amendments to the “round lot” and “odd-lot information” definitions previously adopted to harmonize with the adopted NMS amendments.

The Amendments were simplified significantly from the proposed rules, in response to comments from market participants, many of which broadly supported the SEC’s goals, but raised concerns related to implementation costs, potential investor confusion, and additional market risks stemming from added complexity.

The tick size proposal was one of four proposals relating to equity market structure, that the SEC proposed on December 14, 2022. On March 6, 2024, the SEC adopted a final rule amending Rule 605, regarding disclosure requirements surrounding order execution.[1] The other two proposals – the proposed “Order Competition Rule” and the proposed “Regulation Best Execution” – have not been adopted to date.

Tick Sizes

The SEC adopted a variable minimum tick size with two gradations for NMS Stocks priced at $1.00 or more. Applicable tick size is determined based on the Time Weighted Average Quoted Spread (“TWAQS”) over the relevant evaluation period. Where the TWAQS is greater than $0.015, the minimum tick size is $0.01. Where the TWAQS is equal to or less than $0.015, the minimum tick size is $0.005.

The TWAQS is defined as the average dollar value difference between the National Best Bid (“NBB”) and the National Best Offer (“NBO”) during regular trading hours. Each unique NBB and NBO is weighted based on the length of time that the particular quote prevailed as the NBB or NBO.

The minimum tick size for each stock will be adjusted semi-annually, on the first business day of May and the first business day of November (each an “Operative Date”). Each stock will retain the same minimum tick size until the next Operative Date. For adjustments operative on the first business day of May, the evaluation period over which TWAQS is calculated is the three months from January through March of the same calendar year. For adjustments operative on the first business day of November, the evaluation period is the three months from July through September of the same calendar year. Minimum tick size will not be changed between Operative Dates. All new NMS Stocks will start with an initial tick size of $0.01 until the next Operative Date.

While the minimum tick size for stocks under $1.00 remains at $0.0001, the TWAQS must be calculated for all NMS stocks, including penny stocks for each evaluation period. If a low-priced stock increases in price such that orders are submitted above $1.00, the TWAQS for the most recent evaluation period determines which minimum tick size applies for those orders over $1.00.

For all NMS stocks, the TWAQS and the applicable minimum tick size will be calculated by the primary listing exchange for the NMS stock. The primary listing exchange must then provide to all competing consolidators, self-aggregators, and exclusive SIPs an indicator of the applicable minimum tick size.

This represents a simplification of the Amendments relative to the proposal in response to many comments that suggested a more streamlined approach. The SEC initially proposed a system of variable minimum tick sizes with four different gradations for stocks priced above $1.00, calculated each quarter based on the TWAQS for the last month of the prior quarter. Several commentors supported reducing the tick size for tick constrained stocks, but expressed concern about the number of gradations, the frequency with which the minimum tick size would change, and the smaller proposed minimum tick sizes.

The SEC explained that its simplification of the rule allows for more efficient pricing, while reducing both the risks of queue jumping and implementation costs from the more varied proposal, and that these changes will help facilitate better pricing for stocks that are tick constrained and reduce transaction costs, allowing the stocks to quote more efficiently. The SEC estimates that the new minimum tick size will result in a three tick intra-spread for stocks that are currently price constrained, allowing for more accurate pricing and more efficient markets.

Execution Price Limitations

While the minimum increments in which trading centers can allow quotations is governed by rule, broker-dealers are allowed to execute orders at even smaller price increments than the minimum quotation tick size. The SEC’s proposed rule would have eliminated this flexibility, prohibiting broker-dealers from executing orders at smaller price increments than the minimum quotation tick size. In response to several comments, the SEC did not adopt this proposal, and has not established a minimum execution pricing increment.

Access Fees

The Amendments also reduce access fee caps for protected quotes on exchanges from 30 mils (or $0.003/share) for all NMS stocks priced at $1.00 or more, down to 10 mils (or $0.001/share). For NMS stocks priced at less than $1.00, the Amendments set the access fee cap at 0.01% of the quote.

Alongside the fee cap, the SEC has also adopted a rule requiring all exchange fees and rebates to be determinable at the time of execution. This is designed to further increase price transparency and allow market participants to understand the net price at the time of transaction. Notably, all volume discounts must now be based on thresholds or tiers achieved during a stated period that occurs prior to the assessment of the fee or rebate, rather than over the course of the current trading month.

As with tick sizes, the final rule is simpler than the proposal. For access fee caps, the SEC proposed a variable access fee cap that depended on the minimum tick size. The SEC received several comments on this proposal, and in response determined that a flat fee cap that does not vary based on tick size will introduce fewer variables, less complexity, and lower cost and operational risk. This approach also aligns better with the current flat access fee cap of 30 mils.

As many exchanges charge access fees at or near the highest permitted level, the new cap is designed to lower access fees in much of the market. The SEC explained that lowering the access fee cap in conjunction with the minimum tick sizes will help reduce pricing distortion, as it will reduce the access fee cap to less than half of the lowest minimum tick size, ensuring that all quoted orders are quoted at an accurate price, rather than an artificially higher or lower price that accounts for a large access fee. They further explained that the cap will also impact pricing transparency more generally across the market, as pricing will more accurately match the quoted display price. The SEC expects that this will decrease conflicts of interest and reduce the use of certain complex order types that are designed to avoid higher fees.

As with the new minimum tick sizes, the adopted rule will reduce implementation costs from the proposal, as the adopted fee caps are a flat fee cap, rather than a fee cap that varies based on the minimum tick size.

MDI Rule Acceleration

The SEC also accelerated the implementation of the definitions of “round lot” and “odd-lot information” relative to other provisions in the previously adopted Market Data Infrastructure (“MDI”) rules, and made other operational changes to the implementation of the new definitions. The MDI rules were designed to modernize the infrastructure for the collection, consolidation, and dissemination of market data. The rules were adopted in December 2020, but implementation of the rules has been delayed.

The MDI rules define “round lot” based on each stock’s share price. Where the price is less than or equal to $250 per share, a “round lot” is equal to 100 shares. Where the price is between $250.01 and $1,000, a round lot is 40 shares; where the price is between $1,000.01 and $10,000, a round lot is 10 shares; and where the price is $10,000.01 or more, a round lot is one share. These definitions are consistent with those adopted in the MDI rules.

The SEC amended the frequency of round lot adjustments so that each stock is evaluated semiannually based on a one month evaluation period. The semiannual adjustments will be operational on the same date as the tick size adjustments each year: the first business day in May and the first business day in November. The evaluation period for round lot definition, however, is only one month. For the operational date in May, the evaluation period is all trading days in March of the same year. For the operational date in November, the evaluation period is all trading days in September of the same year. The SEC intentionally aligned these operational dates to facilitate an orderly market, reduce operational risks, and reduce potential investor confusion.

As the applicable round lot size may change on a semiannual basis, the SEC is also adopting new indicators for dissemination on the exclusive SIPs of the assigned round lots. This also corresponds with the same requirements for minimum pricing increments, and is designed to alert market participants of the relevant round lot definition and minimum pricing increments.

“Odd-lot information” will now include both (1) odd-lot transactions, and (2) odd-lots at a price greater than or equal to the NBB and less than or equal to the NBO, aggregated at each price level at each national securities exchange and national securities association. Odd-lot orders that are priced better than the NBBO will be included in the NMS information that is available to participants in the national market system. Accordingly, the best odd-lot order to buy would be the highest priced odd-lot order that is priced higher than that national best bid.

The substantive changes to the round lot adjustments and odd-lot information definition were all adopted as proposed. The SEC extended the compliance date relative to the proposal to align with the compliance dates for tick sizes and access fees, and to provide market participants more time to prepare for these definitions.

Compliance Dates

For all of the Amendments, except the “odd-lot information” definition, the compliance date is the first business day of November 2025. For the “odd-lot information” definition, the compliance date is the first business day of May 2026.

Key Takeaways from the Amendments

These amendments represent several important updates to U.S. equity market structure, that participants will need to prepare for:

  • Both minimum tick size and the applicable round lot definition are now required to be calculated and reflected as indicators on the relevant stocks.
  • Both the applicable minimum tick size and the applicable round lot definition for an NMS stock may change on the first business day of May and the first business day of November of each year. Although the Amendments provide a month between the relevant evaluation periods and the Operative Dates for easier implementation and preparation, market participants should be prepared for such changes on a semi-annual basis.
  • All fees or rebates applicable to a transaction must be calculable as of the transaction date. This does not prohibit volume-based discounts, or other similar pricing structures; however, such discounts must be based on information knowable as of the transaction date, rather than any potential future transactions.

The main compliance date in November 2025, will be based off of data collected beginning in July 2025. As a result, participants have less than a year to begin implementation of the Amendments, and should begin preparing accordingly.

There are two outstanding proposals relating to market structure: (i) the proposed “Order Competition Rule,” and (ii) the proposed “Regulation Best Execution.” The SEC received comments suggesting that the SEC should take an incremental approach, and defer implementation of the Amendments until implementation of Rule 605, and delay implementation of the remaining proposals until the Amendments are implemented. The SEC declined to comment on deferring the remaining proposals, but stated that the SEC uses as a baseline the world as it exists at the time of adoption.

[1] See Cleary Gottlieb’s blog post regarding the Rule 605 amendments.