Citadel Securities Warns Against Sub-Penny Trading Across Stocks

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(Bloomberg) — Citadel Securities, one of the finance industry’s biggest market makers, said that lowering the minimum price increment at which a security gets traded to less than a penny across all stocks could have a negative impact on markets.

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The trading house founded by Ken Griffin found that, based on research, such a move would not guarantee better pricing for investors and could have “many negative unintended consequences,” according to a white paper to be released Thursday. Citadel Securities has previously recommended the minimum increment be lowered to half a penny only for shares that have a bid-offer spread of less than 1 cent, known as tick-constrained stocks.

Securities and Exchange Commission Chair Gary Gensler is considering reducing the minimum increment as part of a broader push to overhaul Wall Street trading that he announced in June. Currently, exchanges display trades in one-penny increments, though off-exchange wholesalers like Citadel Securities can fill orders at sub-penny increments at times. Gensler has said the current structure raises questions about fairness and competition.

“There is no purpose or benefit to changing tick size” for stocks unconstrained by the current minimum tick increment, or those that have spreads wider than 1 cent, Gregg Berman, director of market analytics at Citadel Securities, said in an interview. For stocks that are tick-constrained, the firm continues to push for lowering the limit to allow exchanges to compete better, he said.

A tick size is the smallest increment that stocks, futures or bonds are priced. In equities, the current tick size for US stocks trading on a public exchange is a penny, so one tick represents one penny. Exchanges such as Nasdaq and the New York Stock Exchange have lobbied for a more harmonized system to better compete with off-exchange trading groups.

Actively Traded

Tick-constrained stocks are actively traded by retail and other investors, and make up about half of all volume and a quarter of trades executed on a daily basis in US equity markets, MEMX said in a report.

Citadel Securities, citing its own trading data, said it provides more price improvement than exchanges for both stocks that are tick-constrained and those that aren’t, meaning any differences are due to factors other than size.

“As the data reveals, in stocks that are completely unconstrained by the minimum quoting increment, and for which price improvement is provided in several cents rather than sub-pennies, the playing field is already level,” it said.

Competition among market participants, including exchanges and trading firms, has been central to changes outlined by Gensler in recent months. Any shift could mark the biggest overhaul for the US stock market in more than 15 years, and the agency’s most-direct response yet to last year’s wild trading in GameStop Corp. and other so-called meme stocks.

Trading, especially among retail investors, took off during pandemic, giving smaller investors greater influence over the market. That intensified the debate over whether consumers get the best prices. The SEC’s plans could directly impact how market makers and brokerage firms like Charles Schwab Corp. and Robinhood Markets Inc. process retail-trade orders.

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