Trading costs could be reduced as stocks may soon be quoted in smaller increments.

Investors may soon see their favorite stocks quoted in half-penny increments.

The SEC is set to vote on Wednesday on a proposed rule change that would allow for smaller pricing increments for many large-cap stocks, possibly reducing the minimum increment to a half-cent. This rule was introduced by the agency in late 2022.

The measure may affect the pricing of some highly liquid Exchange Traded Funds (ETFs) and most of the largest stocks, including those in the S&P 500.

The standard pricing increment for many stocks is one cent.

Quote sizes have been coming down for a long time

Before the mid-1990s, the stock brokerage business was very profitable.

Since the 1800s, the smallest increment that a stock traded at was an eighth of a dollar (12.5 cents). A broker might have a bid of $20.00 for XYZ stock and an ask of $20.125, which is an eighth of a dollar higher.

That turned out to be a very lucrative business.

The minimum tick size underwent significant changes in the 1990s, with the value dropping from an eighth of a dollar to a sixteenth in 1997, and then to a penny in 2001.

The reduction in tick size had a significant impact on the brokerage industry, making stock trading less profitable but offering substantial savings to buyers and sellers of stocks, while also enhancing market liquidity.

Why do we need half-penny tick sizes?

The debate among the trading community has intensified regarding whether to decrease tick sizes further as the volume of trading in the largest stocks has increased. Initially, highly liquid stocks are "tick constrained," meaning they can easily trade if the tick size is reduced. Discussions have been held about adding tick sizes of a tenth of a cent, a fifth of a cent, and a half cent.

What is the purpose of reducing the tick size? It is to lower trading costs, just as minimum pricing increments were reduced decades ago.

The majority of traders in the industry believe that the SEC will opt for a half-cent increase because using one-tenth of a penny as a price increment creates too many price points.

Those who fear their preferred stocks being quoted in small increments will need to adjust to the change.

Any change in the systems that display quotations would likely require a year or more to implement, as most market participants informed me.