Exchange Highlights: MEMX Supports Smart Tick-Lot Sizes to Improve the Public Quote
Volume & Diversity of Liquidity, Exceptional Quoting
Highlights & Recent Developments
- MEMX exchange market share was 5.4% overall and 6.0% in ETPs
- MEMX ranked second in the number of symbols quoted over 75% of the time at the NBBO in thousands of securities
- MEMX data shows active liquidity participation from banks, agency, and retail firms
- The SEC’s new equity market structure plan expected to be revealed soon, possibly in December
- MEMX supports a more flexible tick and lot size regime to allow quoted spreads to naturally adjust to their optimal level
In November, MEMX exchange market share was 5.4% overall and 6.0% in ETPs. MEMX ranked second in the number of symbols quoted over 75% of the time at the NBBO in thousands of securities.
Volume & Diversity of Liquidity
MEMX had 53 members trading on its platform in November, including active participation from 32 firms categorized as banks, agency, and retail firms that accounted for around 47% of add volume. The volume mix from the bank segment has been steadily rising in recent months, up 60% from April to November, 2022.
Market Structure: Round Lot and Tick Size Changes
MEMX supports a data-driven approach to improving the public quote. Round lot sizes and tick increments play an important role in generating the optimal bid-ask spread and displayed liquidity. Today’s one-size-fits-all regulatory regime does not adequately accommodate the diversity of NMS stocks with a broad spectrum of liquidity and security price profiles.
As shown in a new white paper that examines recent stock splits effectuated by Amazon, Alphabet, and Tesla, round lot reform in stocks priced over $250 could save investors as much as $2 billion each year by narrowing spreads and reducing related transaction costs. Significant odd-lot quoting and trading occurs in high-priced stocks today and lowering the round lot size would narrow the SIP NBBO in these securities and improve trade execution prices. Rather than wait for the full implementation of the Market Data Infrastructure Rule (MDIR), the SEC should accelerate round lot changes so that investors can reap these benefits now.
In addition, the SEC should reduce tick sizes from one cent to a half cent in tick-constrained stocks with an average quoted spread of 1.1 cents or less. Our research has shown that tick-constrained stocks trade with significant liquidity at the NBBO that would support trading in a half-penny increment without impairing depth for institutional investors. Alongside this change, we’ve also recommended that the SEC reduce the access fee cap by 50% in tick-constrained stocks trading in a half-penny increment from $0.0030 to $0.0015 per share, which could save the industry an estimated $879 per year in liquidity removing fees.
Our research indicates these changes could improve pricing for retail and institutional investors by allowing exchanges to display better bid/ask quotes. Liquidity is impacted by a stock’s price, volume, and volatility. If an issuer does not split their stock to the optimal price, then a more flexible tick and lot size regime would allow quoted spreads to naturally adjust to their optimal level.
Figure 1 shows these recommended changes would impact ~52% of industry volume (~50% from lowering the tick-size and ~2%+ from lowering the lot size) and 44% of notional value traded (~25% from lowering the tick size and ~19% from lowering the lot size). The tick size change would impact around 1,154 symbols and lot size change around 134 symbols.