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Sub-Penny Trading

Sub-Penny Trading
InvestingBrokers

What Is Sub-Penny Trading?

Sub-penny trading is a practice where brokers and dealers trade in concealed, unregulated markets in augmentations of under a penny through wholesalers, dark pools, and lit exchanges.

The Sub-Penny Rule (SEC Rule 612) of 2005 at present prevents exchanges represented by the SEC from citing trades in increases under a penny. This limitation can result in a misleadingly wide National Best Bid and Offer (NBBO), which is the pricing benchmark utilized by off-exchange market-makers.

Understanding Sub-Penny Trading

Exchanges and electronic communication networks (ECNs) charge access fees to any market participant taking a displayed offer or hitting a displayed bid in exchange for giving liquidity.

Participants who display the bid or offer are given a rebate in exchange for giving liquidity, which is capped at 0.3 pennies per share by the Securities and Exchange Commission (SEC).

Sub-penny trading happens when a market participant in an undisplayed market center, for example, a dark pool, steps ahead of a displayed limit order by a negligible portion of a penny and captures the spread. While the buyer receives a better deal, the seller passes up the opportunity to take care of the request, and the liquidity provider receives no rebates.

Retail brokers acknowledge sub-pennying orders since they're permitted to secure the best conceivable price for their clients, even on the off chance that the trade isn't on an exchange or ECN. What's more, the access fee is in many cases remembered for a merchant's commission, and that means that they're boosted to find orders that don't be guaranteed to pay these fees.

New Rules and Regulations

The SEC presented Rule 612, the Sub-Penny Rule, in 2005 to address the addition issue. Specifically, the rule states that the base price increases for stocks more than $1.00 must be $0.01, and stocks under $1.00 can augment by $0.0001.

The rule restricted sub-penny quoting and not sub-penny trading, so the practice of sub-penny trading endured observing the new guideline in the off-exchange markets.

At the point when Rule 612 was adopted in 2005, the consensus stood that price additions of $0.0001 were financially irrelevant and that main sophisticated investors would utilize these more modest augmentations to step ahead of retail investors. Others contended that technology hadn't adequately advanced to appropriately handle an increase in on-exchange citing for sub-penny trading.

In June 2022, SEC Chair Gary Gensler directed SEC staff to possibly permit stock exchanges to quote shares in additions of under $.01, empowering settings, for example, Nasdaq or the New York Stock Exchange to better contend with wholesalers, which frequently beat the publicly displayed prices on exchanges by adding or subtracting hundredths of a penny to the price of a stock.

The SEC presented a study in 2015 that called for the broadening of augmentations or ticks however changes didn't happen until June 2022 when SEC Chair Gary Gensler addressed the fate of sub-penny trading on exchanges including normalizing tick size across various market centers.

Taking into account the volume of off-exchange sub-penny trading, Gensler is assessing the possibility of contracting the base tick size to better line up with off-exchange activity.

Highlights

  • Retail brokers acknowledge sub-pennying orders since they're permitted to secure the best conceivable price for their clients, even on the off chance that the trade isn't on an exchange.
  • Sub-penny trading is completed in an undisplayed market center like a dark pool.
  • The SEC presented Rule 612 out of 2005 which prevents exchanges from citing in increases under a penny.

FAQ

How Does a Sub-Penny Trade Work?

As of now completed exclusively in dark pools or lit exchanges, expect a stock is quoted at .75 x .76 when a retail investor is hoping to sell 1000 shares. While placing in a sell limit order at .75, a contending market maker has a hidden bid of .7510 for 1000 shares. At the point when the customer submits the sell order, the hidden bid buys the 1000 shares and the customer is filled at .7510 on the 1000 shares, as opposed to .75 as displayed in a regulated exchange market.

Where Can I Buy Sub-Penny Stocks?

In spite of the fact that changes are being viewed as in 2022 by the SEC to trade sub-penny stocks on the regulated exchanges, sub-penny trading just happens now on dark pool markets, private exchanges for trading securities that are not accessible by the investing public.

Is Sub-Penny Trading Regulated?

Sub-penny trading is at present unregulated and completed in an undisplayed market."Sub-pennying" alludes to bids drifted by brokers, dealers, and high-frequency traders.who frequently usurp a limit order with a hidden bid that is a small part of a penny better. By doing this, they get their transactions executed first, allowing bidders the best opportunity to capture the spread.