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Sep 01, 2021

Members Exchange calls for stocks to be priced in half-cent increments

Exchange says current rules cause bid-ask spreads that are ‘demonstrably too wide’

An upstart exchange has called on the SEC to allow pricing of certain stocks in half-cents to lower costs for investors.

Members Exchange (MEMX), which is backed by more than a dozen financial services firms, submitted a proposal to the US regulator this week arguing that the current system leads to bid-ask spreads that are ‘demonstrably too wide’.

MEMX has requested the change for stocks that trade with an average spread of 1.1 cents or less. Around 1,000 stocks representing close to half of daily US market volume regularly trade with a penny spread, says the exchange.

Under Rule 612 of Regulation NMS, stocks must be priced in increments of at least $0.01 if the quotation is at least $1. Where the quotation is less than $1, the stock can be priced in increments of $0.0001.

The SEC is currently conducting a broad review of market structure, focused on payment for order flow, the gamification of trading through mobile brokerage apps, and rules that require trades to be executed at the best available price.

‘SEC chair Gary Gensler has indicated a willingness to ‘freshen up’ the SEC’s rules to better account for current trading realities,’ says MEMX in a blog post.

‘Getting tick sizes right will make trading more efficient in a large number of actively traded securities that currently trade with artificially wide spreads. That’s why we’re advocating for tick-size reform as the SEC undertakes its upcoming review of equities market structure.’

In a white paper, also released this week, MEMX uses the example of GE’s recent reverse stock split to demonstrate how the current rules widen bid-ask spreads and raise costs for investors.

On July 30 the US car company conducted an eight-for-one reverse stock split that saw its share price rise from $12.69 to more than $100. The move saw GE’s average quoted spread fall from 7.64 basis points (bps) to 1.95 bps, says MEMX.

‘Before its reverse split, GE traded with a one-cent spread, the minimum possible under the current tick regime, virtually all day,’ notes the white paper.

‘[But] since GE traded around $12.95 at that time, that one-cent minimum increment translated to a 7.64 bps spread. Quoting in GE was therefore artificially ‘constrained’ by the tick size before the reverse stock split increased the price of the security.’

MEMX launched in September 2020 with nine backers including BofA Securities, Citadel Securities, Fidelity Investments and Morgan Stanley. A further nine financial firms, such as BlackRock, JPMorgan and Goldman Sachs, have also invested in the project. In July the exchange hit a new high of 3.3 percent market share of US securities trading.