An industry survey conducted by IEX Group Inc. found that most institutional investors support reducing price increments for tick-constrained symbols to half-penny increments, as well as reducing the exchange access fee cap.
The Securities and Exchange Commission proposed an update to Rule 612 of Reg NMS in December 2022. It proposed reducing price increments from whole-penny to half-penny, fifth-of-a-penny or 10th-of-a-penny. The IEX survey found that 74% of institutional investors would support half-penny increments for tick-constrained symbols, while 68% and 77% opposed fifth-penny and 10th-penny increments, respectively.
The IEX survey contained responses from 217 institutional investors out of 1,200 who were contacted, according to Ronan Ryan, the president of IEX Group.
This proposal was one of four SEC proposals from December 2022. The Rule 605 updates, which would require monthly quality-of-execution reports from broker/dealers, and the Rule 612 update on pricing increments are the most popularly accepted in the financial industry, while Regulation Best Execution and the Order Competition Rule have been widely criticized.
Incremental Change
IEX also aggregated the comment letters sent to the SEC for Reg NMS Rule 612 and found that 21 of the 22 asset managers and all 13 pension funds that submitted letters supported half-penny increments.
The 13 supportive pension funds included CalPERS, CalSTRS and the Ontario Teachers’ Pension Plan.
Among the supportive asset managers were BlackRock, the Vanguard Group and Invesco. T. Rowe Price did not offer specific feedback to the half-penny proposal, writing, “We do not know the correct size for varying securities.”
T. Rowe Price’s letter did object to narrower ticks, stating, “We have seen overly narrow ticks contribute to behaviors that are not in the best interests of long-term institutional investors such as sub-penny jumping of trading queues, less incentive to quote, and more flickering and fading of quotes.”
IEX’s Ryan notes that $.002 and $.001 pricing increments “likely takes it too far” for many in the financial industry, on both the buy and sell sides. He explains that reducing increments too far could overwhelm exchanges and managers with more quotes and messages. Bundling large numbers of shares into single orders would also be more difficult.
There is also some apprehension about changing too much too quickly. Ryan explains that many firms have an attitude of “let’s do half a penny and see where this goes.” Increments of $.005 are something of a “Goldilocks” solution that allows some symbols more pricing flexibility without fragmenting pricing by too much.
Exchange Fees
The Rule 612 proposal would also reduce the cap on exchange access fees. Currently, exchanges cannot charge more than $.30 per 100 shares to access their quotes. Ryan explains that this rule was created to protect investors from monopolistic exchanges.
The fee cap was set in 2005 and was based on market pricing at that time, but most trading volume is still near that cap today, despite gains in efficiency and technology in the meantime, according to Ryan. The new SEC proposal would reduce this cap to $.10 per 100 shares. Ryan says this a relatively simple change that exchanges could handle and implement quickly.
According to the IEX survey, 83% of institutional investors either agree (46%) or strongly agree (37%) with reducing access fees, with only 5% opposing a reduction.
Of the 22 asset managers, 20 support this element of the proposal. Dimensional Fund Management did not address the issue in its letter, and State Street Global Advisers wrote that further research was needed on this issue: “We recommend conducting empirical tests to examine whether a reduction in the access fee cap is beneficial to competition and liquidity in the market.” This response was listed as “mixed” by IEX.
The 13 pension funds listed were, again, unanimous and in favor of reducing access fees.
Tags: BlackRock, CalPERS, CalSTRS, SEC, State Street Global Advisors, T. Rowe Price, Vanguard