Proposed Amendments for Regulation NMS

The U.S. Securities and Exchange Commission (SEC) proposed various rule amendments to Regulation National Market System (Regulation NMS) that would adopt variable minimum pricing increments for quoting and trading NMS stocks, reduce access fee caps, and enhance the transparency of better-priced orders.

Regulation NMS background

The SEC adopted Regulation NMS in 2005 to take advantage of the data processing and communications technology then available and to address concurrent changes in the markets. In 2020, the SEC adopted the MDI (Market Data Infrastructure) Rules to update and modernize the equity market infrastructure responsible for the collection, consolidation, and dissemination of equity market data in the NMS.

Rule 612 – minimum pricing increments

Rule 612 under Regulation NMS sets minimum pricing increments for quotes and orders in NMS stocks. These increments were set at $0.01 for stocks at or greater than $1.00 and $0.0001 for those less than $1.00. The SEC noted that many NMS stocks are artificially constrained by the minimum pricing increment rather than liquidity and price competition.

The SEC seeks to replace this “one-size-fits-all” tick approach with an objectively calculated, varied approach that determines the minimum pricing increments in a manner that reflects their trading characteristic differences. Barring certain exceptions, the Regulation NMS amendments would establish the following tick sizes for quotations, orders, indications of interest, and trades in NMS stocks priced to or greater than $1.00:

Minimum Pricing Increment	Time-Weighted Average Quoted Spread During Evaluation Period
$0.001	Equal to or less than $0.008
$0.002	Greater than $0.008 but less than or equal to $0.016
$0.005	Greater than $0.016 but less than or equal to $0.04
$0.01	Greater than $0.04

 

The primary listing exchange would be responsible for measuring and calculating the Time-Weighted Average Quoted Spread of each NMS stock during March, June, September, and December, and the appropriate minimum pricing increment would be applicable for the following three months.

Rule 610 – access fee caps

Rule 610 under Regulation NMS imposes a limit on the fees charged for access to protected quotations. For NMS securities priced at or greater than $1.00, a trading center cannot impose an execution fee that exceeds $0.0030 per share. For NMS stocks priced at less than $1.00, the fee cannot exceed 0.3% of the quotation price per share. The fees are calculated based on then-current fees and reflect the minimum pricing increment of $0.01 per share. The SEC notes that many exchanges have adopted complex fee schedules, in part, to encourage the submission of liquidity and various volume-based tiers to reward a minimum level of liquidity. The fees are largely based on volume and calculated at month-end, impeding the market participants’ ability to evaluate the total price at the time of execution along with best execution and order routing.

The SEC seeks to reduce the access fee caps for protected quotations to balance the need to cut access fee caps to accommodate the minimum pricing increment reduction with the ability of the agency market business model to charge fees for access.¹ The proposed access fee caps are as follows:

Protected NMS Quotation	Proposed Fee Cap
Stock priced $1.00 or more with a minimum pricing increment of $0.001	$0.0005
Stock priced $1.00 or more with a minimum pricing increment greater than $0.001	$0.001
Stock priced less than $1.00	0.05% of the quotation price

 

The SEC is also proposing that exchanges make all fees and rebates determinable at the time of execution.

Transparency of better-priced orders

The MDI Rules implemented in 2020 expanded the content of data made available for dissemination within the NMS and adopted a decentralized consolidation model for the collection, consolidation, and dissemination of consolidated market data. In the rules, the SEC included new definitions for “round-lot” and “odd-lot” information. Regarding the definitions’ implementation, it adopted a phased transition plan.

Now the SEC is proposing to accelerate implementation of the round-lot and odd-lot information definitions so market participants can better understand current prices and market liquidity when entering orders and to aid best-execution obligations. Specifically, the SEC is proposing that compliance with the round-lot and odd-lot definitions be required 90 days from adoption of the final rule amendments.

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^{1 Agency marketing trading centers bring together buyers and sellers and typically charge a fee for their execution services.}