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US Market Data Reforms – Complicated, Cumbersome, Or Comprehensive: By Kelvin To, Founder And President Of Data Boiler Technologies

Date 21/03/2025

Following the US SEC’s approval of the Consolidated Tape (CT) governance plan in late 2024, the ‘Market Data Infrastructure Rules’ (MDIR) and the ‘Minimum Pricing Increments (a.k.a. Tick Size), Access Fees, and Transparency of Better Priced Orders Rules’ (TBPO) are set to be implemented in November 2025. Odd Lot information is to be included by May 2026. The 897-page MDIR and 518-page TBPO introduced new frameworks, definitions, and updated various provisions of Reg. National Market System (NMS). Let’s dive into the approved changes and review how complicated they are: 

  1. §242.600(b)(21) the expanded definition of ‘Core Data’ when implemented will include: (A) quotation sizes; (B) aggregate quotation sizes; (C) best bid and best offer; (D) national best bid and national best offer; (E) protected bid and protected offer; (F) transaction reports; (G) last sale data; (H) odd-lot; (I) depth of book data; and (J) auction information. 

  1. Among which, most Investment Firms (IFs) are excited about getting “Five Levels of Depths” at the Securities Information Processors (SIPs)/ CCs for the first time. §242.600(b)(26) “the definition of depth of book data …  included price levels are the five prices below the national best bid and above the national best offer…” Complications are: 

  1. MDIR added a new ‘40 shares’ tier, and §242.600(b)(82) when implemented, will have a four-tiered definition of ‘Round Lot’, i.e. “100 shares for stocks priced $250.00 or less per share, 40 shares for stocks priced $250.01 to $1,000.00 per share, 10 shares for stocks priced $1,000.01 to $10,000.00 per share, and 1 share for stocks priced $10,000.01 or more per share.” The SEC expects NMS stocks that have an average closing price over $250 per share will have a narrower spread. 

  1. Investor education is needed given quotation sizes will no longer be represented by the number of round lots, but core data elements will be disseminated by SIPs/ CCs in share sizes, rounded down to the nearest round lot multiple. Also, “quotations for odd-lot orders priced better than the NBBO are required to be displayed as the number of shares available in an odd-lot size that are aggregated at the same price… odd-lots that aggregate into a round lot … could also establish a price level, as long as there is at least one round lot of interest—unitary or aggregated—on at least one SRO.” The SEC did acknowledge that both the round lot definition adopted in the MDIR and the amended tick size will impact the NBBO.  

  1. Given new round lot NBBO will be protected, order protection requirements in Rule 611 and the prohibitions on locked and crossed markets in Rule 610(d) will be expanded: “(a) only [134] stocks priced over $250.00 will be assigned to a round lot size less than 100; and (b) increasing the notional size thresholds [to $10,000] of the new round lot sizes … [12 NMS stock that] currently have non-100 round lot sizes—would be assigned to round lot sizes based on their per share price… all round-lot orders in these stocks would be protected quotations...” Per MDIR footnote 399, “non-automated quotation (i.e. ‘manual quotation’ a.k.a. ‘slow quote’) are excluded in core data with respect to protected bid or offer.” Benchmark reference price arbitrage would persist due to multiple-NBBOs from different PPs/ SIPs/ CCs. 

  1. TBPO further requires that odd-lot information to include a best odd-lot-orders to buy and sell (BOLO). TBPO footnotes 908, 965 and 968 stated, “initially market participants may need to explain to their customers … the technical and operational requirements … will necessitate distinct product changes … literally hundreds of exchanges, vendors, and subscribers, each with different development priorities and system capabilities… the compliance date [by May 2026] … testing… exchanges … to file … changes pursuant to … new round lot definition.”   

  1. Per TBPO footnote 910, “BOLO may serve as the benchmark execution price for execution quality statistics in rule 605 reports” Interestingly, at footnote 917, “the Commission . . . is NOT setting forth minimum data elements needed to achieve best execution … will be a supplement to, rather than a replacement for, price improvement statistics [in order size categories based on notional order size and whether the order is for a fractional share, odd-lot, or round lot] relative to the NBBO… mitigate concerns about ‘gaming’ execution quality reports.”  

  1. Regarding tick size, §242.612(b)(2) when implemented, will permit SRO, Alternative Trading System, vendor, or broker or dealer to display, rank, or accept from any person a bid or offer, an order, or an indication of interest in an increment no less than $0.005 if the NMS stocks have a narrow Time Weighted Average Quoted Spread (TWAQS =< $0.015) during the ‘Evaluation Period’. The SEC expects the spreads will be reduced for these NMS stocks (approx. 58% of daily trading volume or 43% in dollar volume).  If the TWAQS was greater than $0.015, the minimum tick size remains at $0.01.  

  1. §242.600(b)(89)(i) requires “the primary listing exchange for each NMS stock to calculate and provide to CCs, SAs, and the exclusive SIPs (E) an indicator of the applicable round lot size …” Per §242.612(a)(2), “TWAQS means the average dollar value difference between the NBB and NBO during regular trading hours where each instance of a unique NBB and a unique NBO is weighted by the length of time that the quote prevailed as the NBB or NBO.” 3-month Evaluation Period (January-March / July-September) has a one-month lag for tick and round-lot tier assignment; thus the 6-month operative period are from May to October, and from November to April. 

  1. In view of the Exchanges’ motion, the SEC has a partial stay of the amendments to rule 600(b)(89)(i)(F) that requires “the primary listing exchange to provide an indicator … of the applicable minimum pricing increment… under the definition of regulatory data” with respect to Order Protection Rule 612, and rule 610(c) regarding reduction in access fee cap. 

  1. Retail Liquidity Programs (RLP) under SEC exemptions would not be affected, where sub-penny price improvement will continue to be permitted to allow Exchanges to compete with OTC markets. That being said, “quotes in RLP are not displayed…. market participants do not see the full liquidity available in RLP.” 

  1. The high concentration of trading in closing auctions is a phenomenon related to the growth of passive, index-tracking investment strategies through mutual funds, ETFs, and similar products. The SEC believes that “order imbalances and indicative prices helps market participants determine whether to participate in auctions,” thus, action information will be included in core data per §242.600(b)(5), but IFs are not obligated to consume it, i.e. subscription is optional. 

  1. The SEC did consider the outbound message traffic, and CCs will “only be required to generate and offer one or more consolidated market data products, which can contain some or all of the elements of consolidated market data” per §242.600(b)(16) framework. ‘Going fast by traveling light’ is how the SIPs can catch-up to the exchanges’ PPs. 

  1. To curb Exchanges from optimally restricted access to price information, MDIR §242.603(b) “requires SRO to provide … to all CCs and SAs in the same manner and using the same methods … as such SRO makes available any information to any other person.” Amid we criticize the SEC for not going far enough to “deemphasize speed as a key to trading success,” it is light years ahead of the EU.  

Overall, the changes are comprehensive around one single theme – increasing NBBO refresh rates with tighter spreads. Per TBPO page 181, “The round lot definition will narrow the spread for NMS stocks that have an average closing price over $250 per share by showing better prices for these stocks. The amended minimum pricing increments will reduce the spread for those NMS stocks that have a narrow TWAQS and will allow these stocks to be priced more competitively in smaller increments, which will more accurately reflect supply and demand.”  

I have said this in the past, “queuing and wait time at the checkout counters if putting in layperson terms... artificially altering the queue (equal waiting line at all checkout counters) may affect the ‘apparent,’ not the real supply and demand for securities...” Hubert DeJesus at BlackRock shared this insight during a SIFMA roundtable in 2022, “When the number of price points is reduced, more liquidity gathering aggregate at those price points. But when the number of price points is increased, then it essentially fragmenting the quote and dispersing liquidity across multiple prices.”  

TBPO footnote 1005 described the excessive intermediation phenomenon, “Because profiting off of the spread is easiest when the marketable orders filled are small, obtaining high priority in the queue at each tick is essential to such strategies. High-frequency, proprietary traders are generally better able to obtain such priority, and consequently investors may have less opportunity to profitably fill their trades using limit orders.”  Average investors lack sophistication to compete. Meanwhile, data centers rent seek 24x7, Exchanges maximize money making hours and strategic moves to locate away from Secaucus, Mahwah, Carteret present new opportunities andchallenges. Lastly, let’s wait and see if SIPs/ CCs are willing to “increase bandwidth to cater for the additional data,” likely at an additional cost to the subscribers.

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By Kelvin To, Founder and President of Data Boiler Technologies 

Data Boiler is a Type C organization member of the European Commission’s Data Expert Group. Between my patented inventions in signal processing, analytics, machine learning, etc. and the wealth of experience of my partner, Peter Martyn, we are about Market Reform, Governance, Risk, Compliance, and FinTech Innovations to create viable paths toward sustainable economic growth. 
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