INTELLIGENTTICKS
A BLUEPRINT FOR A
BETTER TOMORROWU.S. equities markets are the most transparent and resilient in the world.
The process of price discovery — bringing millions of buyers and sellers
together in a massive electronic marketplace to determine a fair price — isa great technological and economic achievement of the modern age. And
the accessibility of our well-regulated markets to Main Street investors
means that prosperity and financial security can be widely shared.
Yet the regulatory framework that governs our markets has not kept
pace with the astonishing advances in technology. To address this,Nasdaq launched Revitalize, our blueprint for market reform, in 2017. We
followed that in 2019 with TotalMarkets, an expansion of our original
blueprint that focused on market structure.
One of the highest-priority reforms recommended in both reports is
replacing the current one-size-fits all tick regime with an intelligent
tick regime that would improve markets and benefit investors, publiccompanies, and exchange members alike.
The current approach to tick sizes needs to be modernized, as it fails
to meet the market’s needs which we believe ultimately costs investors
money. A smarter approach — which has already been adopted in markets
outside the U.S. — will lower costs for investors and reduce trading
friction.
Following the release of TotalMarkets, we convened a coalition of market

participants to study the tick size issue closely, analyze data, and work
collaboratively on a specific set of recommendations. The findings of thiseffort follow. I wish to personally thank the members of that group for
their deep insight and dedication to enhancing U.S. markets, including
Enrico Cacciatore from Voya Investment Management, John Comerford
from Credit Suisse, Chris Iacovella from the American Securities Association(ASA), Mehmet Kinak from T Rowe Price, Justin Schack from Rosenblatt
Securities and Eric Swanson from XTX Markets.
Nasdaq believes that free markets with clear, consistent and fair rulesthat catalyze innovation are extremely powerful. Reforming the outdated
tick size regime is an important step toward ensuring that U.S. equities
markets evolve and continue to drive widely-shared prosperity.
We look forward to the work ahead.
Sincerely,

Tal Cohen
Executive Vice President and Head of North American Markets
Nasdaq, Inc.
Lauren Dillard
Executive Vice President and Head of Global Information Services
Nasdaq, Inc.

Executive Summary
In two major reports — Revitalize: Reigniting America’s Economic Engine and TotalMarkets:
Blueprint for a Better Tomorrow ­Nasdaq has laid out a comprehensive roadmap forreforming the U.S. public equities markets. Our markets are the most liquid, competitive
and technologically advanced in the world, yet we believe change is essential.
Among our recommendations, we make a case for replacing the current one-size-fits alltick regime with an intelligent tick regime that would improve markets and benefit all key
stakeholders — investors, public companies, and exchange members alike.
Tick sizes — the minimum increments by which a stock can be quoted — are currently
identical for all traded entities, regardless of market capitalization, volume, or share price.
That means a $2 stock is quoted at the same minimum tick size as a $2,000 stock.
Many of the issues afflicting the market today can be traced back to the current tick size
regime, drawing the ire of both investors and issuers. The current tick size structure is
sub-optimal for equities of all sizes, as well as for investors:•

Many low-priced stocks are tick-constrained, often trading one-tick wide when
there is widespread desire and market forces to trade at a smaller tick increment.
Such tick-constraints create long quotation queues, slowing fulfillment, creating
inefficiencies and diminishing price discovery. This drives trading to invertedfee or “taker-maker” markets, where larger, lower priced, more liquid stocks tend
to trade heavily. In these cases, a narrower minimum tick would reduce bid-ask
spreads, saving investors money, and make trading more efficient.

•

Many high-priced stocks, conversely, trade at spreads that are multiples of the
one-penny minimum tick increment. This increases investor costs, usage of
odd-lots, flickering quotations, non-displayed trading that doesn’t support pricediscovery, and price instability. Time priority for resting orders diminishes, andpassive executions are outbid by economically insignificant amounts. Outbidding
becomes so inexpensive that time priority becomes essentially non-existent,
destroying the reward and incentive to post passive liquidity and diminishingprice discovery.

In both instances there is less quote competition and price protection, resulting in wider
spreads that further discourages these activities in a self-reinforcing cycle. Investors andissuers suffer.
Data show that these problems are getting worse. One contributing factor is the steadydecline of stock splits in recent years. During the decades prior to the credit crisis, splits
were common. Today, they are rare, causing many stocks – including some of the mostactively-traded market titans — to trade at prices significantly higher than historicalnorms. In a market with a “one-size-fits-all,” one-penny minimum increment, alongwith 100-share round lots and sophisticated trading algorithms, this share-price creep
means more and more issues trade at the “wrong” tick size, and suffer the associatedinefficiencies.

4 I December 2019

Technology today allows for an intelligent tick regime that we believe will lower costs forinvestors and decrease complexity without artificially widening spreads. Nasdaq strongly
supports this, and to drive progress we convened a working group to share and analyze
tick data and tick increment proposals. The working group studied the current tick size
regime to determine whether a more intelligent tick size regime could benefit investors
by improving tradability and lowering the cost of trading. Representatives from buy-side,sell-side, market maker, and retail firms joined to collaborate with us and think throughwhat a potential proposal could look like. The working group, among others, included
Enrico Cacciatore from Voya Investment Management, John Comerford from Credit
Suisse, Mehmet Kinak from T Rowe Price, Justin Schack from Rosenblatt Securities, andEric Swanson from XTX Markets. Together, this group analyzed and compared multiple
potential tick regimes and provided valuable and varied input. There was rigorous
analysis, spirited debate, and ultimately, support for a new tick regime.
As we describe in the pages that follow, we have developed a smarter tick proposal thatwould create an easy-to-implement table of of trading increments to account for a wide
variety in size, volume, and, stock price. Importantly, stock spreads would not artificiallywiden under this proposal; rather, stocks would be assigned the next smallest increment
by quoted spread e.g., a stock with average spread of $0.12, would be in the $0.10
increment category. In fact, based on prior research, the wider ticks we propose—which
are always narrower than existing spreads—are expected to improve quote competitionand narrow spreads, even in those stocks that would be assigned the wider tick size
buckets. This new approach is data-driven and designed to do no harm while we believe
doing considerable good.
In proposing this new structure, we recognize two important points. First, we expect thatvarious market participants (including those who worked with Nasdaq on this proposal)
will continue to consider and debate the specific details of an intelligent tick regime. We
welcome that conversation and believe strongly that the overwhelming majority will
support the concept.
Second, we recognize that this proposal addresses a non-exhaustive set of challenges toour markets as we view this as a foundational and critical starting point. Other related
issues that market participants and policy makers should consider include round lot
size, order protection, access fees and liquidity rebates, dollar-based versus basis-point
trading, stock splits and optimal stock pricing, to name just a few.
We do not consider this an intellectual exercise. Our goal and hope in convening theworking group and publishing this report is to advance the debate and spur the Commission
to act. The sooner we start, the sooner we can rewrite the markets of tomorrow.

December 2019 I 5

Intelligent Ticks Proposal
Nasdaq argued in Revitalize: Reigniting America’s Economic Engine and TotalMarkets:
Blueprint for a Better Tomorrow the one-size-fits-all tick regime governing U.S. equity
markets is sub-optimal, and a more intelligent tick regime would improve the markets andbenefit investors, public companies, and exchange members alike.
To remain effective, our markets must continuously evolve, deploy innovative technology,
and modernize rules to fit a changing world. For example, the Regulation NMS tick regime,
adopted when markets were dominated by human traders buying and selling stocks on
crowded trading floors, has become less effective as markets evolved. Its binary tick rule
— one penny for all stocks priced above a dollar; sub-pennies for those priced below —now
governs 6,200 widely-varying public companies’ stocks. This ranges from trillion-dollar megacaps to $50 million micro-caps, securities that trade billions of dollars of notional value daily
to those trading little if at all, and stocks priced from $1 per share to $2,000 per share. The
same blunt rule also covers 2,300 diverse exchange-traded products with assets of tens of
millions to hundreds of billions of dollars; based on broad-based and narrow funds; holding
domestic and global assets, and including equities, commodities, fixed income, and multiple
asset classes. Today’s “one-size-fits-all” tick regime may work optimally for a portion of thesestocks and ETPs, but that segment is shrinking.
The data shows our current “one-size-fits-all” regime has costly consequences. Many lowpriced stocks are tick-constrained, meaning they nearly always trade one tick wide. The
market appears willing to trade with a narrower spread that has the potential to reduce costs
for traders and investors. Tick constraints create long quotation queues, slowing fulfillment.
The resulting inefficiency drives trader and investor focus on time priority and speed while
diminishing price priority and, therefore, price discovery. This distortion pushes market
participants to inverted taker-maker markets where participants achieve faster executions

CHART 1: Estimated Ticks Too Wide or Too Narrow
Note: Tick constrained stocks defined as stocks with an average NBBO spread
under 1.1 cents. Stocks with ticks defined as too narrow are those with fill rates
under the 25th percentile. Data averaged over October, 2019.
60%

Too Narrow
Tick Constrained% of Stocks

50%
40%
30%
20%
10%
0%
Under $5

$5 to $10

$10 to $20 $20 to $50 $50 to $100

$100 to$200$200 to$500

Greaterthan $500

Source: Nasdaq Economic Research

6 I December 2019

by improving their place in the market-wide queue.1 The data shows that larger, lower priced,
more liquid stocks are most likely to be tick-constrained, and to trade heavily in inverted
markets.
Other stocks trade at large multiples of the tick increment, leading to wider spreads,
increased prevalence of odd-lots, flickering quotations, and non-displayed trading that
doesn’t support price discovery. When ticks are too narrow, time priority for restingorders diminishes in value: traders patiently awaiting passive executions are outbid byeconomically insignificant amounts. At the extreme, outbidding is so inexpensive thattime priority becomes essentially non-existent, destroying the incentive to post passive
liquidity and reducing quote competition. As quote competition declines, price discovery
weakens and spreads widen; when spreads widen, quote competition and price discovery
weakens further and so on. Investors and issuers suffer.
Data show the challenges are growing. A decline in stock splits, and the resulting rise inaverage stock prices, increases the frequency and inefficiencies of too-narrow ticks. In
the decades prior to the credit crisis, stock splits were more common. Today, stock splits
are rarer, causing many stocks, including several widely-held blue-chip stocks, to trade at
prices significantly higher than historical norms. High stock prices combined with onepenny ticks, 100-share round lots, and sophisticated trading algorithms, makes trading
outliers and inefficiencies more prevalent.

CHART 2: Average Price of S&P 500 Constituents
$110

45

$100

Average Price of S&P 500 Stocks

35

$80

30

$70
$60

25

$50

20

$40

15

$30
10

$20

2018

2016

2017

2014

2015

2012

2013

2010

2011

2008

2009

2006

2007

2004

2005

2002

2003

2000

2001

1998

1999

1996

1997

1994

1995

1992

1993

0
1990

5

$0
1991

$10

Number of Stocks with Price > $200

40

$90

Source: Nasdaq Economic Research, Bloomberg

We think the industry supports change. There is widespread, growing agreement that we
see as building blocks of progress. First, tick increments are critical to successful markets,
especially to attracting displayed liquidity, narrowing effective spreads, and generating
optimal reference prices. Second, the current tick regime is sub-optimal for large swathsof securities, especially low-priced stocks constrained by the tick size and regularly
experience excessively wide spreads on a percentage basis. Third, technology andcustomer sophistication has evolved in a way that allows the market to support a more
intelligent tick structure than was the case in decades past.
To hasten consensus building, Nasdaq convened a working group to share and analyze tickdata and tick increment proposals. The working group studied the current tick size regime to1

So-called “maker-taker” markets are trading venues that offer rebates to orders that provide liquidity and charge fees to those thattake it. “Inverted” or “taker-maker” markets, pay rebates to orders taking liquidity and charges fees to those providing it.

December 2019 I 7

determine whether a more intelligent tick size regime could benefit investors by improving
tradability and lowering the cost of trading. The working group included representatives
from the buy-side, sell-side, market maker, and retail sectors: Enrico Cacciatore from Voya
Investment Management, John Comerford from Credit Suisse, Mehmet Kinak from T RowePrice, Justin Schack from Rosenblatt Securities, and Eric Swanson from XTX Markets among
others. The working group analyzed and compared multiple potential tick regimes, andprovided valuable and varied input. There was not unanimity on all the aspects of the
proposal; there was general collaboration, cooperation, spirited debate and ultimately,support for the intelligent tick concept.
Based on substantial effort with the working group, we believe we have developed asmarter tick proposal:•

Stocks would trade in one of six increments: $0.005, $0.01, $0.02, $0.05, $0.10,
and $0.25.

•

Stocks would be categorized based upon their duration weighted average quoted
spread over the measurement period.

•

Stocks spreads would not widen under this proposal; rather stocks would be
assigned the next smallest increment by quoted spread (e.g., a stock with average
spread of $0.12, would be in the $0.10 increment category).

•

Listing exchanges would administer the tick regime, calculating and calibrating
quoted spreads, determining applicable increments, and publishing stock lists.

As described below, data shows that this proposed regime produces better quoting andtrading outcomes than other potential regimes.
Nasdaq’s proposal attempts to address a discrete set of challenges in the national market
system. There are other, related challenges that that market participants and policy
makers should consider including round lot size, order protection, access fees and liquidity
rebates, dollar-based versus basis-point trading, stock splits and optimal stock pricing, toname just a few. Rather than risk doing too much and over-complicating the debate, we
focused on improving the tick regime. Doing so will help with those other challenges andwill benefit investors and issuers alike. Furthermore, we believe this proposal to be lessdisruptive and easier to implement than potential reforms that would address the above
all at once.
Nasdaq hopes this proposal will advance the debate and spur the Commission to act;change takes time. There are many constituencies and subject matter experts. There isroom for disagreement, and valid concerns about investor education. The Commission
needs time to thoughtfully develop, propose, refine, adopt, and implement any new,intelligent tick regime. The sooner we start, the sooner we progress.

8 I December 2019

Background: Regulation and Technology
Continuously Evolve
The challenge of establishing optimal tick increments has existed for many years and has
been greatly impacted by tectonic shifts in technology. From the 1970s development of
the national market system through 1999, tick increments were measured in fractions
and applied in markets that were highly concentrated. Tick increments set by the New
York Stock Exchange, the American Stock Exchange and Nasdaq effectively harmonized all
trading in those shares.
This changed in 1999 and 2000, when market fragmentation, decimalization andautomation began radically shifting how market participants traded. Regulation ATS
triggered a proliferation of execution venues, some of which experimented with variable
tick regimes under ambiguous regulatory requirements. This coincided with improved
and automated execution technologies that new, disruptive entrants employed to great
benefit, leap-frogging established players by skipping old technologies and fractions
completely. Progress was messy, characterized by increasing fragmentation and achallenging lack of uniformity as market participants transitioned to new technology at
varied speeds.
In 20052, Regulation NMS established a baseline and a path to a unified tick increment,
consistent with the prevailing technology. The Commission adopted a simple, uniform
quotation and trading increment of one penny for stocks priced above a dollar and subpennies for those priced below. This left the vast majority of stocks trading in a one-sizefits-all environment despite large differences in trading characteristics. Shortly after, theEuropean Union chose a different path, establishing a multi-tier multi-dimensional tickregime. Putting aside the relative merits and outcomes of the two regulators’ choices, it
is clear that technology was not a hindrance to more complex tick regimes. The conceptof customized minimum ticks for different categories of securities has been successfully
deployed in the EU as well as major Asian markets including Japan and Hong Kong.
In 2016, the Commission launched a Tick Size Pilot to test the impact of two distinct
changes related to tick size: (1) forcibly widening tick increments to $0.05 in an attempt
to consolidate greater liquidity at the inside quote; and (2) testing a trade-at rule tounderstand its impact on displayed liquidity and execution quality.3 While the Tick Size
Pilot is widely considered a failure,4 it demonstrated that U.S. markets could function
effectively with multiple minimum tick increments and surrounding rules, absorbing theadvanced technological requirements with little disruption.
Market technology continues to evolve; regulation must evolve with it. Today’s fully
automated markets and dispersal of technology empower us to differentiate more tickincrements in smarter ways.

2
3
4

Reg NMS as referenced here was adopted in 2005 with multiple implementation phases through 2007.
Assessment of the Plan to Implement a Tick Size Pilot Program. Originally Submitted to the NMS Plan Participants July 3, 2018,
Revised August 2, 2018. Available at https://www.sec.gov/files/TICK%20PILOT%20ASSESSMENT%20FINAL%20Aug%202.pdf
See, e.g., Pragma, SEC’s Tick-Size Pilot Will Cost Investors More Than $300 Million (Sept. 7, 2018), available at:https://www.pragmatrading.com/2018/secs-tick-size-pilot-will-cost-investors-300-million/.

December 2019 I 9Data Demand Change
Data show the one-size-fits-all tick no longer meets the demands of the market negatively
affecting a wide swath of stocks. As shown in Chart 3, on a percentage basis, the penny
tick affects stocks quite differently. As prices fall, one-cent spreads become too large as apercentage of value. For stocks priced $1, the one-penny tick represents 100 basis points;
at $10, 10 basis points; at $100 only 1 basis point; and for a growing number of stocks
like Amazon and Google, priced above $1,000 a share, less than one-tenth of a basis
point. Yet, in all cases the tick is the same. This is most harmful for smaller, less-liquid
stocks because the tick represents a higher percentage (basis points) of value, which ends
up costing investors money.

Chart 3: Average Spread(bps) vs. Stock Price200

Note: Data averaged over themonth of October, 2019. Average
spread is the average duration
weighted NBBO spread in basis
points. Chart Limited to corporate
equities with a price greater than
$2.

50

BFC

ISRL

HIFS

BH CCF

100

TPL

COKE

ANAT

Average Spread (bps)

ALX

ATRI WTM
CACC

ESGR

CABO

Y

CHE

CACI
BIO

20

LII
TFX
BLK

10

MKL

MELI

AZO

EQIX

BKNG

CMG
CHTR

5

GOOG
GOOGL

BA

The one-cent tickcreates a barrier that
constrains stocks.

2

V
XOM C

1

$2

$5

$10

AMZN

MA
BRK.B

$20

$50

CELG
FB
JPM MSFT

$100

$200

AAPL

$500

$1,000$2,000

Average Price

Source: Nasdaq Economic Research, SIP, FactSet

Chart 4: Proportion of Tick
Constrained Stocks
Ticks tend to be too wide forstocks priced under $100

15%
Proportion

Note: Data averaged over themonth of October, 2019. Tick
constrained stocks defined as
stocks with an average NBBO
spread under 1.1 cents. Chart
limited to corporate equities witha price greater than $2.

10%

5%

0%
Under $5

$5 to $10

$10 to $20 $20 to $50 $50 to $100

$100 to$200$200 to$500

Greaterthan $500

Average Stock Price
Source: Nasdaq Economic Research, SIP, FactSet

10 I December 2019

When faced with a spread constraint, observed in Chart 4, market participants will havean incentive to find ways to narrow the spread. Due to the various pricing structures
across different venues (maker-taker vs. inverted), spread capture, or the economic
spread, can be different than the one-cent displayed spread. In essence, all-in economic
spreads in maker-taker markets are 1.6 cents.5 Thus, as seen in Chart 5, tick-constrained
stocks trade more on inverted venues which compresses the spread more than the tickregime allows.

Note: Data averaged over themonth of October, 2019. Average
spread is the average duration
weighted NBBO spread in cents.
Chart Limited to corporate
equities with a price greater than
$2.

18%

Inverted usage tends to be higher for
stocks that are tick constrained

16%
Average Inverted Market Share

Chart 5: Inverted Usage vs.
Average Spread (�)

14%
12%
10%
8%
6%
4%
2%
0%
Under 1.1¢

1.1¢ to 2¢

2¢ to 5¢5¢ to 10¢

10¢ to 20¢

Greater than20¢

Average Spread (Cents)

Source: Nasdaq Economic Research, SIP, FactSet

Inverted usage is a result of low-priced stocks trading with long queues. Chart 6 displays
the fact that queue length is substantially higher amongst stocks priced lower than $5.
The longer queues associated with low-priced stocks further highlights the issues that thetick constraint adds. As alluded to above, once a stock becomes constrained at one cent,price priority becomes limited.

Note: Data averaged over themonth of October, 2019. Queue
Length measured as average
NBBO size/ADV multiplied by the
number of minutes in a tradingday. Chart Limited to corporate
equities with a price greater than
$2.

6Median Queue Length (Minutes)

Chart 6: Queue Length vs.
Stock Price

Lower priced stocks havelarger queue lengths

5
4
3
2
1
0
Under $5

$5 to $10

$10 to $20 $20 to $50 $50 to $100

$100 to$200$200 to$500

Greaterthan $500

Average Stock Price
Source: Nasdaq Economic Research, SIP, FactSet

5

If the best bid and offer on a maker/taker exchanges is $0.01 a market participant accessing that quotation would pay $0.003
more if buying on the offer or receive $0.003 less when selling on the bid. Therefore the full economic spread is $0.016 - 1.6
cents.

December 2019 I 11

On the other hand, the one-cent tick also affects those stocks that trade on the opposite
side of the stock price spectrum. Our research shows that too small of a tick size canresult in increased quotation volatility and less price competition that impairs pricediscovery, creating an imbalance between providers and takers of liquidity.6
It is instructive to review the recently concluded Tick Pilot in which a sample of smaller
stocks traded on a nickel tick. The NMS Plan participants submitted a study of the impactof the pilot, in which a variety of market quality metrics were analyzed, including bid/ask
spreads.7 The study found, not surprisingly, that many pilot stocks experienced substantial
spread increases—a preordained outcome for stocks whose spreads prior to the pilot wereless than a nickel.8 What was interesting to observe, however, is that for stocks whose
pre-pilot spreads were ten cents or more, spreads actually decreased under the nickel
tick.9 In terms of why this might be the case, the study reports:“…the cost of setting a new price level rises with nickel ticks compared withpenny increments. Market makers, therefore, may be less subject to other market
participants “penny jumping” their bids and offers in less-liquid securities and,
therefore, feel more confident quoting narrower spreads.”10
The Plan participants’ assessment analyzed the full spectrum of market cap, price, andADV strata for Pilot securities.11 This shows that for some types of stocks, the nickel tickcreated a constraint where none had existed before. On the other hand, other types ofstocks seem to have benefited from the wider tick, specifically those that tended to havehigher prices or lower levels of trading volume. The clear takeaway is that the preferredtick size for a given stock certainly varies according to the characteristics of the stock.
Tick size changes have been implemented in Europe. The ESMA Tick Regime, through MiFID
II, addressed the adverse effects associated with a minimum increment being too narrow.
The Autorité des marchés financiers (AMF) conducted a study on the outcome of the tickregime.12 The AMF’s study not only analyzed the impact that ESMA’s tick regime had onmarket quality, but it also stated the context in which the tick regime was introduced. For
example, the study discusses a “race-to-the-bottom” environment where trading venues
continuously lowered ticks in order to offer improved prices and to increase market share.
However, moving toward an “ever-finer degree of tick granularity,” diminished priceimprovement for those whose ticks were too narrow. As the AMF describes:“If the tick size is too small, the outbidding cost is no longer significant (it costs next
to nothing to outbid) and liquidity does not aggregate effectively as there are too
many increments of possible prices. Insertions, modifications and cancellations oforders are therefore more frequent, affecting book legibility and price formation.”13
The “race-to-the-bottom” led regulators to conclude that ticks had generally become too
narrow. The impact of the ESMA tick regime was, therefore, mostly widening the minimum
tick. Since, as the AMF writes, “Tick size strongly influences both liquidity and the priceformation process, and must always be analyzed in relation to the spread,” the regulators
determined that “an appropriate tick such that the corresponding spread is between 1.5
ticks and 2 ticks for liquid securities and between 1.5 ticks and 5 ticks for less liquid

6
7
8
9
10
11
12

13

12 I December 2019

See Phil Mackintosh, Two Charts Show How Smart Traders Use Odd Lots to Compress Spreads in High-Priced Stocks, available athttps://www.nasdaq.com/articles/two-charts-show-how-smart-traders-use-odd-lots-compress-spreads-high-priced-stocks-2019-06
See Tick Study at fn. 1.
Nasdaq notes that this is a situation the proposal herein seeks to avoid. As described throughout, a stock would never be forced toa wider spread than what it currently experiences.
See Tick Study at p. 19.
Id. at p. 22
Id. at appendix, Figures 52, 53, and 54.
MiFID II: Impact of the New Tick Size Regime, March 27, 2018, available at https://www.amf-france.org/en_US/Publications/
Lettres-et-cahiers/Risques-et-tendances/Archives?docId=workspace%3A%2F%2FSpacesStore%2F4ee6cbf6-c425-4537-ab74ef249b9d316d
Id. at p.3.

securities.”14 The relationship between tick size and spread serves as the basis of our
proposal. Overall, the AMF concluded that the European tick regime had the desired effectin improving overall market quality — although spreads slightly increased, market depth
also increased and quote volatility diminished.
In the U.S., the problem of sub-optimal minimum ticks is becoming more pronounced as
stock splits have declined and as average stock prices have risen.15 Data show that since2007, stock splits have become far less popular as shown in Chart 7.

CHART 7: Number of Stock Splits Per Year
Note: Limited to S&P 500 Companies

100

50

16
20

14
20

12
20

10
20

08
20

06
20

04
20

02
20

00
20

98
19

96
19

94
19

92
19

19

90

0

Source: Wall Street Journal, Birinyi Associates

Since then, the average stock price has almost doubled, and the average price of an S&P
500 stock is over $100. As we show in Chart 9, higher stock prices eventually lead towider spreads and more odd-lot trading. This, in turn, decreases the tradability of stocks
which has been shown to increase companies’ cost of capital.16 As of October, 2019, over
one third of S&P 500 companies had prices over $100 per share.
This worsening tradability and transparency into the market has driven the SIP committee
17
to consider adding odd lots to the tape. Comment letters on that issue mostly agree
that high priced stocks cause tradability issues, however, many disagree that odd lots
should be used for best execution or be covered by the Reg NMS Order Protection Rule.
That’s consistent with ESMA’s reasoning discussed above: a $2,000 stock trading one-centwide for one or two shares is not representative of actionable or meaningful liquidity.
Moreover, the tick, at 0.0005%, would be uneconomic to capture for a market maker.
Insight into decreased tradability from a minimum tick that is too narrow can be seen
when analyzing fill rates across stock prices. We examined the fill rate of passive orders
submitted by large investment banks. Chart 8 highlights the average fill rate across stock
price buckets. The diagram illustrates that fill rates are generally higher for low-priced
stocks and begin to decline once a stock is priced greater than $100. As mentioned above,
when the tick becomes too narrow, time priority becomes insignificant. A trader may
14 MiFID II: Impact of the New Tick Size Regime, March 27, 2018, available at https://www.amf-france.org/en_US/Publications/
Lettres-et-cahiers/Risques-et-tendances/Archives?docId=workspace%3A%2F%2FSpacesStore%2F4ee6cbf6-c425-4537-ab74ef249b9d316d
15 See Phil Mackintosh, Three charts that show how dramatic the drop in stock splits has been at:https://www.nasdaq.com/articles/three-charts-that-show-how-dramatic-the-drop-in-stock-splits-has-been-2019-06-27
16 See Phil Mackintosh, 3 Compelling Reasons for Companies to Split Stocks at: https://www.nasdaq.com/articles/3-compellingreasons-for-companies-to-split-stocks-2019-09-12
17 See Securities Information Processor Operating Committees, Odd Lots Proposal, available at:https://www.ctaplan.com/publicdocs/CTA_Odd_Lots_Proposal.pdf

December 2019 I 13

improve the bid for a stock, patiently awaiting a passive fill. Sometime later, anothertrader may outbid the first trader, but by an economically insignificant amount, obtaining
price priority and perhaps capturing the fill. This discourages the first participant from
improving the bid in the first place. At the extreme, time priority becomes non-existent,
reducing the reward and therefore the incentive to post displayed liquidity sinceoutbidding is so cheap.

CHART 8: Average Fill Rate Across Stock Price
Note: Data based on U.S. corporate equities over the month of October, 2019.
Stocks limited to those priced greater than $2. Fill rates based on executions
completed by large investment banks
Fill rates are lower for
high-priced stocks

6.0%

Average Fill Rate

5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Under $5

$5 to $10 $10 to $20 $20 to $50 $50 to $100

$100 to$200$200 to$500

Greaterthan $500

Stock Price
Source: Nasdaq Economic Research

Additionally, as Chart 9 shows, high-priced stocks tend to have wide spreads (blue bars)
and experience more odd lots inside the National Best Bid or Offer (NBBO). In fact, using
Nasdaq order data, we see that stocks like GOOG and AMZN, with spreads closer to $1,
have odd lots inside the quote almost 70% of the time. In contrast, stocks like AAPL and
MSFT, with spreads below two cents, have relatively small percentage of odd lots inside
the NBBO.
In fact there has been a consistent increase in the use of odd lots to trade, and a recent
Wall Street Journal investigation determined that algorithms are becoming agnostic toround lots. 18

18 See Wall Street Journal, Tiny “Odd Lot” Trades Reach Record Share of U.S. Stock Market, Oct. 23, 2019, available at:https://www.wsj.com/articles/tiny-odd-lot-trades-reach-record-share-of-u-s-stock-market-11571745600

14 I December 2019

CHART 9: Percent of Time True Nasdaq Top of Book <100 Shares
Note: Based on Nasdaq order data over first week of October, 2019. Chart limited
to corporate equities with a market cap greater than $2 billion.
70%

Odd lot usage higher
for high-priced stocks

Average NBBO Spread ($)

Average Percent of Time

60%

$0.01

$0.20

50%
40%
30%
20%
10%
0%
$5 to $10

Under $5

$10 to $20 $20 to $50 $50 to $100

$100 to$200$200 to$500

Greaterthan $500

Stock Price
Source: Nasdaq Economic Research

Another finding supported by the tick pilot data is that if higher priced stocks traded at awider tick there would be more depth displayed at each tick increment.
Most importantly, what all this shows is that if the tick is too wide (tick constrained) or
too small (stocks trading in multiple tick increments), the mismatch creates inefficiency
that increases the companies’ cost of capital.19 That in turn hurts listed companies andinvestor returns, potentially harming economic growth and retirement stability.

19 Lin, J.C., & Singh, A., & Yu, W., 2009. Stock splits, trading continuity, and the cost of equity capital. Journal of Financial Economics
93, 474 – 489.

December 2019 I 15

The Proposal: Trust the Market
and Do no Harm
Nasdaq, with the help of the working group, evaluated multiple proposals and concluded
that other global tick regimes such as the MiFID regime are more complex thannecessary (Note: more detail surrounding MiFID and other alternatives can be foundin the appendix). For example, applying a MiFID-like but simpler approach to the U.S.
market could potentially yield adverse outcomes for highly liquid names. Therefore, we
decided an approach that would “do no harm” to quoted spreads would be the goal for
implementing an intelligent tick regime in the U.S.
After studying the data and comparing these and other potential models, we reviewed
data depicting how stocks trade today based on their quoted spread. Trusting the market
and assuming stocks should trade at or near their quoted spread, we considered a variety
of stratification based on tick increments from sub-pennies to dollars. Ultimately, we
decided upon a market based approach where no tick would be wider than a stock’s
average quoted spread. Using this method, no security would be forced into a spreadwider than that at which it currently trades, resulting in unchanged or potentially tighter
spreads. Further, as stock trading characteristics change over time, the proposed model
would allow market forces to determine the proper tick size: a stock’s quoted spread
would determine in which of the six buckets it would trade: .5cps, 1cps, 2cps, 5cps, 10cps,
25cps.
For example, a stock that currently trades at an average quoted spread:•up to $.011 would be placed in the $.005 bucket•

between $.011 and $.02 would be placed in the $.01 bucket•

greater than $.02 and less than or equal to $.05 would be placed in the $.02 bucket•

greater than $.05 and less than or equal to $.10 would be placed in the $.05 bucket•

greater than $.10 and less than or equal to $.25 would be placed in the $.10 bucket•

greater than $.25 would be placed in the $.25 bucket

Chart 10 illustrates how stocks would be grouped into tick buckets by their current
quoted spreads. The benefit of a tick regime where the market determines the tick size isthat stocks may move in and out of various tick buckets depending on market events.20

Chart 10: Illustration of aMarket-Based Approach

MDRR

TSRI

ADS

BIO

TFX BLK

HY

CMG

LMT

$0.100ADBE

BA$0.050CAT$0.020$0.005

DIS

PLUG

AMZN

Greater than $0.25 in$0.25 Tick Bucket

GOGO

KGC

FEYE

CLNY MFA NLY TWO

KMI

CVS

DVN
KR

T

KO

$0.10 to$0.25 in$0.10 Tick Bucket$0.05 to $0.10 in$0.05 Tick BucketMA$0.010 NIHD

GOOG

SHW
CHTR

DTSS

$0.200
Quoted Spread

MELI
EQIX

ICUI

ESLT

B

BRQS

$0.500Note: Tick buckets determinedby average duration-weighted
quoted spread. Illustration basedon current quoted spread in themarket (2019). Chart is limited
to corporate equities priced
greater than $2. Data represents
an illustration of where webelieve stocks might trade after
implementing such a proposal.

JOUT

HMG

$1.000FB$0.02 to $0.05 in$0.02 Tick Bucket

AAPL$0.011 to $0.02 in$0.01 Tick Bucket

JNJ

PG
SBUX MSFT$0.011 in$0.005 Tick Bucket

C

Where the tick constrained stocks could go

$2

$5

$10

$20

$50

$100

$200

$500

$1,000 $2,000

Price

Source: Nasdaq Economic Research

20 Stocks would not move in and out of tick increments dynamically based on their quoted spread. Instead they would be evaluatedperiodically, and remain static until the next review

16 I December 2019

Generally speaking, this approach yields clear results with stocks falling within buckets
according to their current status.
Based upon the above data and stratification, Chart 11 represents an illustration of thecount of corporate equities that would be grouped into each tick size bucket using present
day quoted spreads.

Symbol Count

Note: Tick buckets determinedby average duration-weighted
quoted spread. Illustration basedon current quoted spread in themarket (2019). Chart is limited tocorporate equities priced greaterthan $2.

1000

ADVT Bucket

1,010

<1M
1M-10M
10M-100M
100M<

149

800
600

200

504
166

188

229

235

270

302

437

179
126

131

117

$54B
$49B

50B

$12B

$7B

40B

$38B
$32B

$27B

$10B

$9B
$41B

20B
10B

358

202

780

248

167

372

0
60B

30B

869
757

400

Average Value Traded (ADVT)

Chart 11: Distribution of
Symbols

$25B

$40B

$23B

$26B

$21B

$20B

0B
0.005

0.01

0.02

0.05

0.1

0.25

Tick Bucket

Source: Nasdaq Economic Research

Importantly, this market based approach could be applied to all securities. For example,
Exchange Traded Products (ETPs) would be stratified using the same value-weighted
average spread as shown in Chart 12:$10.000

Chart 12: Illustration of aMarket-Based Approach for
ETPs$1.000
Quoted Spread

Note: Tick buckets determinedby average duration-weighted
quoted spread. Illustration basedon current quoted spread in themarket (2019). Chart is limited to
exchange traded products. Data
represents an illustration of where
we believe ETPs might trade after
implementing such a proposal.

$2.000NBBO Spread Bucket

FLAT$5.000

0.25
0.1
0.05

DFVS

DTUS
EEH
FUE

VQT

DRR
CNY
DTO

0.02
0.01
0.005

FIEE
DFVL

FIYY

FIHD

FBGX

DWAQ

$0.500FLEU
CAPE$0.200

ONEQ

IXN

JKK

JKJ

IJT

IHF
IJJ

$0.100

ITA

IHE
IGM

IYT

$0.050IEI
IWD$0.020$0.010

BND

GBIL
GLD

$0.005

MDY

VGT

VDC

IBB

IVW
VUG
IWF

JKH
IHI

IJH

IVV
DIA

IWM

SPY

QQQ

SHV

$50

$100

$150

$200

$250

$300

$350

$400

Price

Source: Nasdaq Economic Research

December 2019 I 17

Based on that stratification, ETPs would fall into the same six buckets as shown in Chart
13. Highly liquid ETPs would skew heavily toward the two smallest increments due totheir current high liquidity and narrow quoted spreads.

CHART 13: Illustration of Market-Based Approach for ETPs
Note: Based on average duration weighted quoted spreads. Limited to exchange
traded products.

Symbol Count

800

740
570

600
446
400

178

198

200
91

87

0
60B

458
431

215
163

215

$57B

50B

ADVT Bucket (ETPs)<1M
1M-10M
10M-100M
100M<

Advt

40B
30B

182

117

86

$55B

$18B

20B

$9B

10B

$15B
$6B

0B
0.005

0.01

0.02

$3B
0.05

$1B

$0B

0.1

0.25

Source: Nasdaq Economic Research

The proposed model would benefit the market in several measurable ways. First the
proposal would create a narrower $0.005 increment that can be expected to reduce thecurrent spread for a significant number of tick constrained stocks. Additionally, larger
increments for stocks that currently trade in significant multiples of today’s $0.01
minimum tick, would reduce quote flickering and promote price stability. Many securities
across the spectrum would benefit from smarter tick increments in the form of lower
trading costs.
We do not believe that the implementation of this proposal would incur significant costs
to the industry. Any adoption of intelligent ticks could re-use the industry work done
to manage the different minimum-tick groupings created for the Tick Pilot, minimizing
costs. As described above, based on the Pilot’s results, we believe spreads should only
narrow, reducing spread costs to investors. We estimate the potential spread saving fromthis proposal in a range of $100 million to $1 billion annually. Evidence also suggests
fragmentation, routing complexity and, opportunity costs may also be reduced.
Minimal costs, coupled with no stock being worse off, suggest that this proposal would
greatly benefit investors.

18 I December 2019

Mechanics of the Proposal
Nasdaq is proposing to change as few elements of Rule 612 of Regulation NMS as arenecessary to promote progress. The Rule would continue to place the same requirements
and limitations on sending, receiving, price-sliding, and after executing orders that currently
apply to both on- and off-exchange trading. Given the importance to investors, issuers, andtraders of stability and predictability, stocks should change buckets infrequently, preferably
only once every six months. Additionally, our working group recommends a slower, phasedin approach to change rather than an abrupt, complete rollout of the new tick regime.
Further, the working group recommends there be a clear path to reverse course if there is
any unexpected negative impact from implementation of a new tick regime.
Primary listing markets would be required to calculate duration-weighted quoted spreads
over a defined measurement period – i.e. the six month review period mentioned above
to identify the appropriate tick increment, and communicate that information to member
and the public. Specifically, the listing exchange will:•produce a Securities Tick Size Daily List each night, identifying the securities
included in each tick bucket;•

produce a Securities Tick Size Change List, identifying any securities that moved
from one bucket to the another;•collect data and provide metrics using the same quantitative methods used toestablish the tick buckets;•

post the list on an exchange website each day, barring any delays in the source
data; and•the Securities Tick Size files will be pipe-delimited .txt files.

Conclusion
Nasdaq is profoundly grateful to the market participants that spent significant timecollaborating on the development of this proposal. We welcome the opportunity to
expand the discussion, and to continue working with the industry, issuers, investors, andregulators to refine this proposal and build a consensus for change.
Tick size is a crucial component of trading costs and investor experience. The current
one-size-fits-all approach undermines the tradability of hundreds if not thousands of
securities, particularly low-and high-priced publicly traded securities. Too wide a tick size(i.e., tick constrained) results in increased trading costs and can lead to long order queues
and, as a result, excessive fragmentation. Too small of a tick size can increase volatility
and a reduction in price competition that impairs price discovery, thus once again creating
an imbalance between providers and takers of liquidity. Today’s one-size-fits-all approachis particularly suboptimal for small-and-medium-growth companies.
The proposed tick regime has the potential to increase liquidity, promote quotecompetition, and reduce trading costs, all of which will serve to protect investors by
improving market quality. It will also enable a better path forward for assessing theright level for fees and rebates and for addressing round lots and odd-lots as averagestock prices increase. Technology-driven market changes warrant a review of the trading
increment and empower us to adopt a smarter and more efficient tick structure.

December 2019 I 19

Appendix
Other Models Are Too Complex
As mentioned previously we evaluated multiple proposals and concluded that other global
tick regimes such as the MiFID regime are overly complex and could potentially yieldadverse outcomes for highly liquid names. We will demonstrate some of the complexities
below.
The MiFID tick approach is designed by categorizing stocks not only by price, but also byliquidity, as measured by average daily trades (ADT). Table 1 illustrates the categorizationof tick sizes based on price and ADT.

Table 1Liquidity Bands
Price Ranges

0< Average
daily number oftransactions <10

10< Average
daily number oftransactions <80

80< Average
daily number oftransactions <600

0< price <0.1

0.00050.00020.0001

0.1< price <0.2

0.001

0.00050.00020.2< price <0.5

0.002

0.001

0.5< price <1

0.005

0.002

1< price <2

0.01

2< price <50.02

5< price <10
10< price <20600< Average
daily numberof transactions<2000

2000< Average
daily numberof transactions<9000

9000< Average
daily number oftransactions

0.00010.00010.00010.00010.00010.00010.00050.00020.00010.00010.001

0.00050.00020.0001

0.005

0.002

0.001

0.00050.0002

0.01

0.005

0.002

0.001

0.0005

0.05

0.02

0.01

0.005

0.002

0.001

0.1

0.05

0.02

0.01

0.005

0.002

20< price <50

0.2

0.1

0.05

0.02

0.01

0.005

50< price <100

0.5

0.2

0.1

0.05

0.02

0.01

100< price <200

1

0.5

0.2

0.1

0.05

0.02

200< price <500

2

1

0.5

0.2

0.1

0.05

500< price <1000

5

2

1

0.5

0.2

0.1

1000< price <2000

10

5

2

1

0.5

0.2

2000< price <5000

20

10

5

2

1

0.5

5000< price <10000

50

20

10

5

2

1

10000< price <20000

100

50

20

10

5

2

20000< price <50000

200

100

50

20

10

5

50000< price

500

200

100

50

20

10

Chart 14 is an illustration of what the MiFID tick table looks like in basis points. One of
the benefits of the MiFID regime is the symmetry across levels of prices and liquidity. For
example, note that spreads in basis points remain within a specific range for each given
level of liquidity, stocks trading between 2,000 and 9,000 ADT will always trade between
2 and 5 basis points, whereas stocks that trade between 10 and 80 ADT will always
trade between 20 and 50 basis points, respectively, regardless of price. However, a major
drawback with the MiFID model contains complexity from the multi-dimensions used todetermine a tick. Table 1 highlights this complexity with six classes of liquidity buckets
and nearly 20 price bands.

20 I December 2019

CHART 14: MiFID Tick Regime
Note: Illustration based on ESMA tick size regime introduced with MiFID II
200
100

Tick Size (bps)

50
20
10
5
2
1
$0.2

$0.5

$1.0

$2.0

$5.0

$10.0

$20.0

$50.0

$100.0$200.0Stock Price (Euros, GBP etc.)
Liquidity

0 ≤ ADT < 1010 ≤ ADT < 80

80 ≤ ADT < 600
600 ≤ ADT < 2000

2000 ≤ ADT < 9000
9000 ≤ ADT
Source: Nasdaq Economic Research

We reviewed a proposal that was constructed similarly to MiFID in terms of constructing
tick increments based on price and a liquidity metric — in this case, average daily value
traded (ADVT). Table 2 illustrates the tick size assignment based on price and ADVT.

Table 2
Price

Value Traded Buckets - Ticks

Min

Max

Under $1M

$1M-$10M$10M-$100M$100m<$1$24.99

0.020

0.010

0.005

0.005

$25

$49.99

0.050

0.020

0.010

0.005

$50

$99.99

0.100

0.050

0.020

0.010

$100

$199.99

0.100

0.100

0.050

0.020

$200

$499.99

0.100

0.100

0.100

0.050

$500

$10,000

0.100

0.100

0.100

0.100

Additionally, Charts 15 and 16, illustrate what this proposal would look like in both centsand basis points. As observed in the MiFID schedule, spreads in basis points remain in a
fixed range for any given level of liquidity.

December 2019 I 21

Chart 15: Proposed Ticks

Tick
Size(bps)($)
Tick Size$1.0000$0.1000$0.0100$0.0010
$1

$10

$100

$1,000$10,000

Price GBP etc.)
StockStock
Price (Euros,

Chart 16: Proposed Basis Points
1,000

Spread (bps)

100

10

1

0
$1

$10

$100

$1,000$10,000

Price GBP etc.)
StockStock
Price (Euros,

The model proposed above was next applied to the current trading environment. Chart 17
highlights that although there are tick constrained stocks that could benefit from a smallertick (blue circles), there are also observable stocks whose spreads would be pushed
forcibly higher (purple circles) — an undesirable result.

22 I December 2019

Chart 17: Proposed Ticks vs. Current Spread
Undesirable Results of MiFID-Like Proposal
Stocks Pushed Lower/Higher
Lower
Higher
$0.200

Avg Spread$0.100TWOU$0.050BE

TMQ
SB$0.010

RLGY

DSX

MNK

ODP

CLNY

$2

$5

PYX

BNFT MDLA
FSLY

REAL
CVET

CHNG
CJ

TEN
AMAG
VAL
AMRX HOME$0.020

EB

LVGO

TLRY

ATRA RTLR
SOLY

MD

CLR
PGTI

MCD
HFC
NCLH

MUR
FDC

LL

BRK.B

CHWY

VSM

MDT
WMT

MFC

DIS
AAPL
MSFT

TD

$0.005
$1

$10

$20

$50

$100

$200

Price

Higher
Lower

Advt

Count of Symbols

16,867,769,579
49,635,653,580

46
578

December 2019 I 23