Coming regulatory changes, strong options performance

Significant Regulatory Changes Ahead; Strong Options Trading and Quoting

Equities Exchange Highlights

On September 18, 2024, the SEC introduced the following three rule changes in equities.

• Rule 612 of Reg NMS (i.e., tick size change): In NMS stocks priced at $1 or greater and with an average quoted spread of $0.015 or less, lower the tick size from $0.01 to $0.005. Compliance date: November 2025.
• Rule 610 of Reg NMS (i.e., access fee cap change): In NMS stocks priced at $1 or greater, lower the access fee cap by 66.6% from $0.003 (30 mils) to $0.001 (10 mils). In NMS stocks priced under $1, lower the access fee cap from 0.30% of dollar value to 0.10% of dollar value. Additionally, exchange fees and rebates must be determinable at the time of execution. Compliance date: November 2025.
• Rule 603(b) and Rule 600(b) of Market Data Infrastructure Rule (i.e., round-lot and odd-lot changes): Decrease the round lot size to 40, 10, or 1 share for NMS stocks priced greater than $250 per share. Compliance date: November 2025. Add odd-lot quotation information to the SIPs, including a new field for the best odd-lot orders. Compliance date: May 2026.

MEMX supports reforms to the tick size and round-lot definition as these changes will contribute to lower investor transaction costs in NMS stocks that cumulatively account for more than half of all share and notional volume. However, lowering access fee cap across all NMS stocks will significantly lower rebates paid to liquidity providers, which could impact quoting and spreads in some securities.

Benefits of tick size change

Lowering the tick size will allow exchanges to quote more aggressively and contribute to narrower quoted spreads. Figure 1 shows there are 1,668 NMS stocks that meet the SEC’s definition of “tick constrained” and these securities accounted for 55% of volume in September 2024. In many securities, the 1-cent tick increment leads to artificially-wide quoted spreads, higher liquidity aggregation at the NBBO, and significant trading inside the NBBO. Tick-constrained securities account for around 77% of all midpoint volume and 18% of all tick-constrained volume is traded at the midpoint.

With the tick size change, the current midpoint will become the NBBO some of the time. Figure 2 shows 715 tick-constrained securities (43% of total) have a stock price less than $10 and these stocks have much wider quoted and effective spreads in basis points than higher priced stocks, on average. More actively-traded, lower-priced stocks are likely to benefit the most from the tick size reduction.

Benefits of round-lot definition change

Figure 1 shows there are 215 symbols with a stock price over $250, which account for 2.7% of share volume and 24.8% of notional volume. Changing the round lot size definition in these stocks to 40 shares or less will improve transparency and narrow the protected quote on the SIP consolidated data feed. The majority of trades in these high-priced stocks are odd lots, which account for 88% of total trades. And there is significant odd-lot quoting and trading inside the SIP NBBO in these securities.

Options Exchange Highlights

MEMX Options recently celebrated the one-year anniversary of our launch. 33 member firms are providing diverse customer and non-customer order flow and broad participation in Penny and Non-Penny options. Strong quote performance has contributed to our market share growth. In September, MEMX Options ranked third out of 18 exchanges in quote performance, with regular electronic market share of 6.1% across all equity and ETF options. In SPY, market share was 5.8% and MEMX Options ranked second among 18 exchanges in quote performance.