Cboe's Perspective on Proposed Updates to Regulation NMS

Adam Inzirillo
April 6, 2023


I hope you’re doing well. You may recall, at the beginning of March I reached out to share that Cboe submitted into the Securities and Exchange Commission’s (SEC) comment file for the Proposal on Regulation NMS: Minimum Pricing Increment, Access Fees and Transparency of Better Priced Orders, a re-introduction of the tick framework we proposed last year with refreshed data from fourth-quarter 2022. I’m following up to share that last week, Cboe submitted its full response to the SEC’s market structure proposal. Our response addresses four key areas of the SEC’s proposal, outlined below.  

Our Views on Minimum Pricing Increments, Access Fees, and Transparency 

Tick Sizes 

Ultimately, we are supportive of updates to the U.S. equities tick framework, but not as proposed. Instead, we recommend a ½ cent tick applied only to truly constrained stocks, a smaller group that we believe will benefit most from a tick change. We believe it’s most prudent to implement this tick change, then evaluate the results and consider more granular changes over time, if proven necessary. The SEC’s more expansive approach risks exposing investors and issuers to unintended negative consequences, but a more measured approach will avoid causing any unnecessary harm. 

Access Fees 

At Cboe, our competitive spirit is a key pillar of our business and informs our approach to everything. As such, we believe access fees should be informed by competition, rather than imposing unnecessary price controls. Reducing the access fee cap to $0.0005 and restricting volume tiers will limit differentiation and competition between exchanges to the detriment of investors. The SEC already has the ability to suspend exchange fees that could be viewed as predatory or harmful to market structure. We believe that ability allows the SEC to ensure investors are protected, yet still benefit from the positive impacts of competition between exchanges.  

Round Lots and Odd Lots 

We strongly support the SEC’s proposed round lot and odd lot reforms and have long been a proponent of this type of reform. In 2022, we advocated for reducing the standard round lot size from 100 shares to 10 shares or 1 share for high-priced securities, as well as for enhanced odd lot transparency through the dissemination of top-of-book odd lot quotation data through the Securities Information Processors (SIPs). As the central public source for U.S. equities market data, the inclusion of odd lot quotations on the SIPs is long overdue. We believe that these changes will enhance transparency and price discovery and help to further reduce spreads. 

Our only concern with the SEC’s proposal is that the 90-day time frame for implementation is unrealistic. These changes will require significant development work from the exchanges and firms that want to process odd lots and round lot conversion to actual share size will likely require industry participants to make considerable changes to their processing and display systems. So, while we are supportive of these changes, we encourage the SEC to reconsider its proposed timeline to ensure that exchanges and firms can designate adequate resources. 

Our View on the Order Competition Rule 

Again, competition is at the root of everything we do at Cboe, and our business was built on dynamic order competition auctions for listed options. However, we do not believe the proposed mandate to submit segmented equity orders into auctions is prudent. Instead, we believe the SEC should encourage and embrace market-driven solutions, such as Cboe’s Retail Price Improvement Program, which offers price improvement in $.001 increments to Retail Member Organizations that enter a retail order.  

If the SEC chooses to move forward with the current proposal, we believe it should propose two-sided auctions that allow intermediaries to backstop executions. We also believe there should be greater regulatory harmonization around the process for exchanges to introduce, modify and price these auctions.  

Our View on Regulation Best Execution 

We continue to support increased clarity and consistency around best execution standards, which we believe will help foster consistency, transparency, competition and improved price discovery – all to the benefit of investors. However, we question if an entirely new rule is in the best interest of investors or whether targeted amendments to existing, fully integrated best execution rules would be more beneficial. We propose changes to current rules that we believe are in the best interest of all end investors and consider the nuances the exist between markets.  

Our View on Rule 605 

We love data and empirical evidence at Cboe, as we believe it is a useful tool to understanding our markets and customers. As such, we support increased transparency and disclosure of enhanced execution quality statistics. However, we believe that prior to implementing wholesale changes to equity market structure, the SEC should begin by refining Rule 605 Reports as proposed to gather more relevant data for analysis to inform any potential market enhancements. 

As always, we appreciate the SEC’s dedication to this work and its commitment to improving outcomes for end investors. We are just as committed to enhancements that benefit end investors and believe the best way to achieve that goal is through measured changes, rather than a complete overhaul. The U.S. equities market currently serves investors incredibly well and we do not want to see the vibrancy of the marketplace unnecessarily dulled. 

We are truly grateful for the trust you put in Cboe and are committed to ensuring the U.S. has fair, competitive, robust and resilient markets that are inclusive of all investors. We will continue to advocate for regulation, rules and policies that we believe are in everyone’s best interest and encourage you to share your perspective with us. As always, please don’t hesitate to reach out to me or a member of our team to share your thoughts and questions.