Round Lot Reform Can Reduce Costs, MEMX Says

There is significant consensus among market participants on Round Lot reform and implementing these changes now will result in fairer and more efficient markets, according to Adrian Griffiths, Head of Market Structure, MEMX.

The SEC’s “infrastructure rule”, which was published in the Federal Register on April 7, 2021, adds a new “round lot” definition to Regulation NMS that will base the number of shares that constitutes a round lot on the price of the security. 

Griffiths said that all but 12 U.S. equity securities trade with a round lot of 100 shares. 

“High-priced securities don’t trade as efficiently as they could under a regime where a round lot is virtually always 100 shares. Our market structure is not really designed to trade these stocks efficiently,” he said during the July 8 STA Open Call on Round Lot Reform.

“We see coordinate effective spreads in these names that are much worse than stocks are not subject to lot constraints. Ultimately, we think that this cost investors money in terms of increased transaction costs,” he said.

As planned, the round lot changes are slated to be implemented after competing consolidators become operational and the current exclusive SIPs are decommissioned, Griffiths said. 

However, without considering the potential for delay, MEMX estimates round lot changes may not be made until sometime in 2024.

“The real issue that we’ve got right now is an issue of timing. We’ve got the right solution, but basically in a holding pattern until the new rules kick in. And, unfortunately, round lot reform happens to be at the very end of the implementation timeline for the infrastructure rule,” he said.

“If you try to be a bit more realistic, I think we’re probably looking at 2025 or beyond before the round lot reform is really going to take effect,” he added.

“If the listing exchanges change the round lot size in additional high-priced securities, we could optimize trading in hundreds of other names without waiting years for implementation of the infrastructure rule,” he said.

To get a sense of the impact of lot constraints on investor outcomes, and the potential effect of the infrastructure rule’s round lot amendments on these outcomes, MEMX analyzed quoted and effective spreads for lot constrained and other securities.

According to the findings, it could cost investors up to $7.5bn if the industry is forced to wait three years for these round lot changes to go into effect.

“Not only would expediting the upcoming round lot changes save investors a significant amount in transaction costs while the industry awaits the implementation of the infrastructure rule, amending round lot sizes now would also improve market efficiency by ensuring that the information disseminated by the SIPs and used by investors to make trading decisions appropriately reflects how high-priced securities trade,” Griffiths said. 

He added that the SEC chose not to require implementation of any of the changes implemented by the infrastructure rule, including the round lot changes, on the current exclusive SIPs to avoid potential implementation costs.

“Realistically, any costs associated with implementing the infrastructure rule’s round lot changes ahead of the required schedule would pale in comparison to the potential benefits to investors of implementing these changes now. Indeed, we believe the round lot changes could be implemented on the current exclusive SIPs without incurring additional costs,” he said.

“While the Commission chose not to make early adoption a requirement that does not mean that we cannot or should not choose to go above and beyond for the investors that rely on the capital markets that we steward,” Griffiths said. 

“We want amendments, we want to engage the industry on issues that we think are very important from a market structure perspective,” he added.