Elimination of one-cent minimum quote increment could have ‘unintended negative consequences’, says Citadel Securities

Citadel Securities has released a new white paper outlining its view that eliminating the one-cent minimum tick increment could have “negative” and “unintended” consequences for the market.

This follows a market maker white paper in May last year which suggested that a reduction in the minimum quote increment to half a penny for tick-limited stocks could alleviate concerns that exchanges were struggling to compete with off-exchange venues for retail flow. Citadel Securities argued that such a discount for tick-limited stocks would encourage participants to quote a tighter spread.

However, other participants made the more drastic suggestion of reducing the increment for all stocks, whether tick-limited or not, arguing that this creates a level playing field for on-exchange and over-the-counter platforms. .

The new white paper from Citadel Securities instead laid out the argument using public 605 data that even when not constrained by the penny quote rule, exchange participants are not contributing or performing. not at such good prices as can be obtained by wholesalers filling the retail trade. orders.

“Proponents argue that exchanges cannot compete with OTC platforms due to the latter’s ability to execute ‘between ticks’, whereas exchanges cannot, creating a level playing field” , Citadel Securities said in the report. “However, our analysis demonstrates that there is no benefit to smaller increments for stocks with spreads greater than pennies.”

The market maker added that any changes to the quote increments might not even necessarily result in exchanges offering more competitive prices.

Citing the SEC’s approval of the NYSE RLP program, Citadel Securities added that the widespread listing of less than a penny could have negative and unintended consequences, including flickering listings, higher trading costs, reduced liquidity and increased fragmentation of securities markets.

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