The Price is Right! A Closer Look at Sub-Dollar NMS Stocks
Market volumes have been exceptional this year. The major volatility event in March caused a shift in market share allocation between exchanges and off-exchange market centers, and as a result Trade Reporting Facilities (TRF) have experienced a steady increase in volume in 2020. In our past analyses we highlighted market quality statistics1 and TRF activity2. In this note, we will provide additional insight into these topics, this time from a stock price perspective, and explore how price points — particularly in sub-dollar National Market System (NMS) stocks — translate into market share.
First, let’s break down U.S. equity market share by price points. The chart below shows that volume in sub-dollar securities increased during the volatility event in March, and by April, sub-dollar market share was at a high of 10%. This trend slowed down in subsequent months, but market share ticked up again in November, reaching 8%.
Figure 1 Volume Breakdown by Price Level3
A major portion of the volume in sub-dollar securities is traded at off-exchange TRFs, which can be hard to predict. TRF trading in sub-dollar securities spiked after March, as seen in Figure 2 below. Trading in sub-dollar names then peaked again in June when it hit 5% of the total market share within TRFs. Maker-taker exchanges also showed modest gains in this time frame.
Figure 2 Sub-Dollar Market Share Continuous Volume4
Figure 3, below, shows market share for all public exchanges, excluding sub-dollar volume. Most public exchanges have seen a downward trend in market share in 2020, some more drastic than others. TRF market share is seen as the clear winner in 2020, capturing approximately 6% more of the market. Cboe® market share has remained relatively steady compared with peers and Cboe exchanges have continued to gain market share since September.
Figure 3 Market Share Excluding Sub-Dollar Securities
Reg NMS Rule 612 specifies minimum pricing increments for NMS stocks. If the quotation, order or indication of interest is priced less than $1.00 per share, the minimum pricing increment is $0.0001. Under this rule, exchanges are required to implement minimum pricing increments, while certain kinds of off-exchange platforms can provide additional price points with fewer restrictions.
While off-exchange trading continues to grow, it is important to consider the price of the securities being traded. Figure 4 below provides a breakdown of TRF market share by price. After the volatility events in March, off-exchange trading in sub-dollar and non-sub-dollar securities began to take off. The variability in TRF trading seems to be driven by volume growth in sub-dollar securities, but this trend may be misleading to market participants, as this growth in volume is concentrated in only a handful of securities.
Figure 4 TRF Market Share Overall
A few stocks with high news coverage appear to be driving many of the spikes observed in sub-dollar securities. Figure 5 illustrates the trading in sub-dollar names with monthly market shares exceeding 0.10%. In June, there were 15 names that each had 0.10% or more of market share, accounting for about 3% of the total market. In November, only 14 names exceeded 0.10% of market share, but accounted for just over 5% of the total market. Sundial Growers (SNDL) and Naked Brand Groups (NAKD) accounted for most of this volume with November market shares of 2.6% and 1.3%, respectively. This concentration of volume can create a volume ripple effect within the same venue that may be well beyond the end investor demand for the stock. This can also create problems for models that use market share as an input when deciding how to route orders in the market.
Figure 5 Sub-Dollar Names Symbol Concentration5
Pricing for Sub-Dollar Names
Sub-dollar names are treated differently under Reg NMS with respect to both minimum pricing increments and the fees that exchanges can charge for accessing their quotations. Exchanges are not allowed to charge more than $0.0030 per share for accessing quotes in securities priced at or above $1. This cap ensures that the maximum price that can be charged for accessing an exchange’s quote is one-third of the minimum pricing increment of $0.01. Due to this cap, the rebates offered by market centers also tend to hover around $0.0030, which is well below the allowable minimum pricing increment. This model has worked well overall, in addition to keeping the intermarket queue competitive for securities priced above $1.
Exchanges have generally also avoided intermarket queue conflicts in sub-dollar names, but no regulation prevents these sorts of issues from occurring in those names. For securities priced below $1, the Reg NMS cap on pricing for accessing an exchange’s quotation is 0.30% of the notional value of the trade, and the allowable minimum pricing increment is $0.0001. Essentially, this means that transaction pricing for stocks below $1 changes with a change in the price of the security. As illustrated in Figure 6 below, if a basis point rebate is used — as some newer exchanges have done recently — it may create increasing opportunities to receive rebates that are potentially higher than the applicable minimum pricing increment and, consequently, higher than the minimum allowable spread. A rebate that is greater than the spread can effectively cross the market quote, which opens up opportunities for participants to trade using a purely exchange-pricing driven trading strategy. As stated before, for model driven routing that can use exchanges market share as an input, this can lead to suboptimal results for the end investor.
Figure 6 Sub-Dollar Rebates vs. Reg NMS Allowed Minimum Spread
Allowing transaction pricing for quotes that is higher than the minimum pricing increment can pose a unique challenge for exchanges. The pricing at Cboe BZX for sub-dollar securities was designed with this in mind. BZX offers a per share rebate of $0.00009 and thus avoids providing a rebate larger than the per share spread, while remaining competitive in the intermarket queue. Similarly, Cboe inverted exchanges provide a zero-cost industry best remove rate for sub-dollar securities, instead of a rebate, which is common for names priced at or above $1. This helps the exchanges avoid providing rebates higher than the minimum pricing increment and protects the integrity of the public quote.
At Cboe, our primary concern is protecting market integrity for all market participants. We believe it would be prudent to revisit the constraints set in Reg NMS, which include minimum pricing increments and caps on pricing quotes. The difference in the rules applicable to securities at or above $1 and sub-dollar securities can effectively mean that the ‘effective’ public quote is now crossed. To avoid this scenario, we believe making pricing a function of the minimum pricing increment may simplify the process.
We look forward to talking with our peers and regulators about potential improvements to this segment of the market as sub-dollar securities continue to gain popularity.
Footnote 1: https://markets.cboe.com/insights/post/54/
Footnote 2: https://markets.cboe.com/insights/post/40/
Footnotes 3, 4, 5: Cboe Market Data
2020 Cboe Exchange, Inc. All rights reserved.
The information in this letter is provided for general education and information purposes only. No statement(s) within this letter should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this letter is available by contacting Cboe Global Markets at www.cboe.com/Contact.