What’s the price of your stock?
It matters because the SEC has adopted final rules to redefine a “round lot.” Currently a round lot is 100 shares. All quotes to buy or sell must display in 100-share increments, at a minimum one-penny spread between the bid to buy and the offer to sell.
You with me? This matters for several critical reasons, not least of which is if you should split your stock.
You might recall that in December 2022 the SEC dropped a MOAB – mother of all bombs – on the stock market with four proposals to amend Regulation National Market System totaling some 1,700 pages.
If you need that many rules, your game is too complicated.
Take Backgammon, the world’s oldest (known) board game dating back 5,000 years. You compete with dice against another player to move your game pieces through 24 triangles fastest.
Pretty simple.
The stock market? Not simple. This is why eyes glaze over when you start talking about market structure. The only thing I’ve found that clears a room at a cocktail party faster is monetary policy.
I like both.
Anyway. Reg NMS was already over 500 pages. Now the SEC believes it can improve the stock market by complicating it with a 300% increase in page-count.
To be fair, opposition – we opposed the proposals – was intensive and the SEC dropped two of the four altogether. At least, for now. Two survived, albeit in modified form. To start, the SEC approved quotes in sub-pennies.
The irony is that a core tenet of Reg NMS is NOT quoting in sub-pennies (for stocks over $1 in price). To be sure, the bulk of trades occur in sub-pennies. The average trade-size is about 95 shares.
Let me illustrate. I bought over eleven hundred shares of LYFT Nov 13 in a marketable trade chopped into a machine-gun rip of orders at $17.6887. Fast traders took three-hundredths of a penny per share as profit. Do that a million times, it’s real money.
It’s a core feature of the stock market today. Stocks like LYFT will show a bid to buy at $17.68, and an offer to sell at $17.69. And literally millions of shares can trade in fractions of pennies between those prices.
It’s even bigger in leveraged ETFs like SPXU, which I bought Nov 18 at the close for $22.7989 and sold Nov 19 at the open for $23.1725 (this alas is how the stock market works now – there are so many compelling things to do besides invest for the long term).
Next year, those quotes will display in half-pennies, complicating the “order book” but ostensibly bringing that hidden crossing of the spread – matching trades between the bid and the offer – into the open.
The trouble is small spreads promote short holding periods. As I illustrated with my trade. If I can make 2% buying at the close and selling at the open, why wouldn’t I? Why wouldn’t Citadel do it every half-second for three mils – three cents a hundred shares?
Now the good news is the SEC is also bringing tiny trades, the odd lots, onto the tape. Heretofore, the trades you see posted to the tape are only round lots. All the volume is counted but odd lots don’t show. We’ll see those happening.
And the SEC has redefined what constitutes a “round lot,” based on stock-price:
- Over $10,000 per share, a round lot is 1 share. Just one stock qualifies. Berkshire Hathaway Class A stock, which already trades in that increment anyway.
- From $1,000-$10,000, a round lot is 10 shares. There are less than 20 stocks in that bracket ranging from Blackstone and Autozone to Booking.com and NVR Inc. These four average 13 shares per trade now (so it shrinks trade-size).
- From $250-$1,000 per share, 40 shares is a round lot. Realize that the average price of the stocks comprising the S&P 500, at current levels, is $230.
- From $1-$250, 100 shares. Implicit is that the SEC wants prices in this range. So, make note, issuers. Splitting your stock to be in the sweet spot with low spreads and bigger trades could be beneficial now because the SEC wants you to trade under $250.
In fact, during tick studies shaping these tranches, the SEC focused on stocks between $20-50. As a trader using our decision-support platform alongside our customers, I too prefer stocks in that range. The probabilities are reliable and predictable.
There are some nuances to these rules around size and time but understand that the SEC wants stocks trading with spreads of less than a penny (there’s no money for sellside research if there’s no spread!), lower stock prices, and displayed odd-lot trades, which becomes moot if they recast the definition.
This stuff mainly goes into effect by November 2025.
What more should you take away, if you’re still reading at this point instead of having left the room like everyone else?
That the SEC wants trading more than it wants capital-formation. The evidence extends further. The market is stuffed with options, single-stock ETFs, leveraged and inverse ETFs. Which depend on more derivatives, called swaps.
If the SEC wanted capital-formation, issuers, they wouldn’t have fostered vastly more speculative instruments than there are individual stocks.
Unless and until we can correct it legislatively, we’ll have to adapt. Stop doing things that harm your best interests. Create beta. Be the herd. Don’t let the wolves get you. We can help.
