SEC Approves Major Overhaul Of US Equity Markets, Largest Reform In Two Decades

The U.S. Securities and Exchange Commission (SEC) unanimously voted Wednesday to adopt new rules for pricing stocks at less than a penny. The legislation is part of a larger package of proposed reforms, signaling the biggest overhaul of U.S. equity markets in almost two decades.

SEC Chair Gary Gensler characterized the effort as "promoting capital formation in a way that links this great market together, in a national best bid, best offer."

Originally, the stocks traded in eights for more than two centuries, drawing tradition from an old custom of cutting the gold coins into "pieces of eight." Eventually, in 1997, the NYSE shifted to 16ths of a dollar before the SEC pushed exchanges to adopt pricing in dollars and cents in 2001.

The upcoming rule change would allow stock exchanges to quote sub-penny increments, promoting more competitive stock prices.

As early as 2022, when the rule was first proposed, Gensler said these changes were necessary to help level the playing field between exchanges and dark markets. He argued that disparities in on-exchange and off-exchange quotes have driven nearly half of all trades off exchanges.

Meanwhile, transaction volume in listed equities tripled in the past 17 years, while the share volume of stocks quoted at less than 1.5 pennies grew to 74% from 54% in 2005.

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At today’s meeting, Jessica Wachter, chief economist and director of the Division of Economic and Risk Analysis (DERA), expressed optimism that the changes will reduce transaction costs and help institutional and retail traders.

Wachter noted the extensive research involved in making these changes, but she believed comparing before-and-after rule-implementation transaction costs would show statistical significance. She was planning to evaluate different trade sizes and their effectiveness.

Commissioner Hester Peirce showed the most skepticism toward new reforms, questioning contingency plans in case they don’t work as intended or cause any negative effects. Peirce, a known critic of the post-2008 regulatory actions, noted that "given the magnitude of the change, the Commission needs to be studying the effects and listening to people in the markets."

Retail broker Charles Schwab and market maker Citadel Securities will be on the watchlist for comments on the matter. Initially, the companies pushed back against these changes, arguing that changes to tick size threaten the stability and efficiency of markets by reducing liquidity and enhancing investor panic during turbulent events.

The new rules are due to take effect in November 2025.

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