By Michael Blaugrund, Chief Operating Officer, NYSE
If there’s one thing upon which market structure pundits agree, it is that the U.S. capital markets are the envy of the world. And if they were to agree on a second thing, it would be that those same markets need real reform.
Calls for change are reaching a crescendo. The volatility associated with meme stock trading ignited public and legislative interest in issues long under the radar, including payment for order flow, T+2 settlement, and short sale reporting. A speech in June by SEC Chair Gary Gensler focusing on equity market structure made clear that regulatory reform is under serious consideration.
While the specifics of forthcoming regulatory proposals are, as yet, unknown, “price improvement” and inconsistencies between on-exchange and off-exchange trading increments have been identified as areas of interest.
To help foster a data-driven, fact-based discussion for industry experts, academics, investors and others with skin in the game — which means all of us — the NYSE has published an important new study. Our report quantifies the aggregate price improvement achieved by U.S. equity investors in H1 2022 and analyzes its composition. The information we’ve assembled is based on public TAQ data and evaluates every regular way trade executed in the first two quarters against the prevailing NBBO at that time.
Some of the findings are intuitive, but others were surprising. Here are some key takeaways:
- Investors received about $72MM in price improvement daily in H1 2022.
- At trade increments available to exchanges, including round-penny and midpoints, on-exchange trading currently delivers 54% of total price improvement.
- Just 12% of total price improvement occurs at sub-penny prices, as public investors are largely unable to compete at such price points.
Additionally, we were able to use our data set to evaluate the hypothetical impact of harmonizing tick sizes, both on-exchange and off-exchange, at a sub-penny increment.
- Investors could save an additional $6.3MM per day ($1.8B per year) if trading increments were harmonized to $0.0025 (i.e., permit quoting at half-pennies and midpoint trading).
- Adopting sub-penny quoting increments would result in an increase in quote message activity of between 24% and 152%, depending on the granularity of the increment. Even at the extreme of 1/10th cent quoting, these levels are modest compared to the industry’s proven ability to manage OPRA data 20-50x larger.
Reducing tick increments has historically resulted in dramatic savings for investors. For example, the U.S. Government Accountability Office found that narrowing ticks from fractions to decimals reduced trading costs for large investors between 30 and 53 percent. Prior NYSE research suggests about 1/3 of market volume is currently constrained by the penny-wide quoting increment.
As a policy matter, we believe public investors should have the same opportunity as any other market participant to bid or offer at the most competitive prices. Our research suggests that doing so at a sub-penny increment for tick-constrained securities would result in meaningful savings for investors.
