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Conformed to Federal Register version

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-87327; File No. S7-18-19]

Commission Statement on Market Structure Innovation for Thinly Traded Securities

AGENCY: Securities and Exchange Commission.

ACTION: Commission statement.

SUMMARY: This Securities and Exchange Commission (“Commission”) statement 

(“Statement”) is intended to facilitate the development of proposals that will improve secondary 

market trading for equity securities that trade in lower volume (“thinly traded securities”). The 

Commission’s interest in considering proposals for improvement in this segment of the 

secondary market extends to proposals that could include the suspension or termination of 

unlisted trading privileges (“UTP”) and/or exemptive relief from Regulation NMS and other 

rules under the Securities Exchange Act of 1934 (“Exchange Act”).

DATES: The Commission’s statement was effective October 17, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments:

• Use the Commission’s Internet comment form (http://www.sec.gov/rules/policy.shtml); or

• Send an e-mail to rule-comments@sec.gov. Please include File Number S7-18-19 on the 

subject line.

Paper Comments:

• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 

100 F Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-18-19. This file number should be included on 
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the subject line if email is used. To help us process and review your comments more efficiently, 

please use only one method. The Commission will post all comments on the Commission’s 

Internet website (http://www.sec.gov/rules/policy.shtml). Comments are also available for Web 

site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, 

Washington, DC 20549-1090 on official business days between the hours of 10:00 a.m. and 3:00 

p.m. All comments received will be posted without change. Persons submitting comments are 

cautioned that we do not redact or edit personal identifying information from comment 

submissions. You should submit only information that you wish to make available publicly. 

Studies, memoranda, or other substantive items may be added by the Commission or staff to the 

comment file. A notification of the inclusion in the comment file of any materials will be made 

available on the Commission’s website. To ensure direct electronic receipt of such notifications, 

sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Cristie March, Senior Special Counsel; 

Deborah Flynn, Special Counsel; Christopher Chow, Special Counsel; or Liliana Burnett, 

Attorney-Adviser, at 202-551-5500, in the Division of Trading and Markets, Securities and 

Exchange Commission, 100 F Street, NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. INTRODUCTION

The Commission is issuing this Statement to facilitate the ability of market participants to 

develop innovative proposals for changes in equity market structure that are designed to improve 

trading in thinly traded securities. Although the Commission believes that the current equity 

market structure generally works well for securities that trade in higher volume, the Commission 
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has concerns that the current “one-size-fits-all” equity market structure, as largely governed 

under Regulation NMS,1 may not be optimal for thinly traded securities.

The secondary market for thinly traded securities faces liquidity challenges that can have 

a negative effect on both investors and issuers. In particular, thinly traded securities, which are 

often also smaller-capitalization securities, tend to have wider spreads and less displayed size 

relative to securities that trade in greater volume, often resulting in higher transaction costs for 

investors.2 Potential investors in such securities also may be concerned that they could 

encounter difficulties finding the necessary liquidity to establish or unwind positions in the 

stocks.3

 A lack of readily available liquidity also may discourage potential market makers from 

electing to make markets in those securities.4 For these reasons, a thinly traded security could 

affect a potential investor’s willingness to invest in that issuer’s securities, possibly resulting in 

even fewer trades.5

 Having a less liquid security also could negatively affect an issuer’s 

financing (e.g., the cost of capital).6 Staff in the Division of Trading and Markets has issued a 

 1 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (adopting 17 

CFR 242.600 through 242.613 (Regulation NMS)) (“NMS Release”). “NMS” stands for the National 

Market System.

2 See Division of Trading and Markets Data Paper: Empirical Analysis of Liquidity Demographics and 

Market Quality, April 10, 2018, available at

https://www.sec.gov/files/thinly_traded_eqs_data_summary.pdf, at 1 (summarizing the quoting and trading 

characteristics of NMS stocks on the lower end of the liquidity spectrum).

3 See, e.g., Transcript for Roundtable on Market Structure for Thinly-Traded Securities, April 23, 2018, 

available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/thinly-traded-securitiesrountable-042318-transcript.txt (“Transcript”), at 35; see also Thierry Foucault, Ohad Kadan & Eugene 

Kandel, Liquidity Cycles and Make/Take Fees in Electronic Markets, 68 J. FIN. 299 (2013) (discussing the 

externality of liquidity demand increases resulting in the increasing supply of liquidity, and an exogenous 

increase in the supply of liquidity resulting in an increase in the demand for liquidity).

4 See, e.g., Transcript, supra note 3, at 24.

5 In addition, one Roundtable participant suggested that it also could affect a company’s attractiveness to 

current and prospective employees. See id. at 21, 85-86.

6 See, e.g., Alexander W. Butler, Gustavo Grullon & James P. Weston, Stock Market Liquidity and the Cost 

of Issuing Equity, 40(2) J. FIN. & QUANT. ANAL. 331 (2005) (finding that stock liquidity is an important 

determinant of the cost of raising external capital and that investment bank fees are significantly lower for 

firms with more liquid stock); Jonathan Brogaard, Dan Li & Ying Xia, Stock Liquidity and Default Risk, 
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paper providing additional background on the unique trading challenges and characteristics 

related to thinly traded securities.7

The Commission recognizes there are various factors that affect the liquidity of a security 

and that market structure changes can address only part of the overall listing and trading 

environment for thinly traded securities. However, the Commission believes that there are a 

number of market structure changes8 that could improve secondary market trading for thinly 

traded securities and is therefore issuing this Statement to encourage innovative approaches in 

this regard.9

II. COMMISSION POSITION

A. Potential Market Structure Innovations for Thinly Traded Securities

The Commission believes that certain market structure innovations that may provide 

benefits to thinly traded securities, when applied on one given exchange, may be less likely to 

succeed if the securities are subject to concurrent trading on multiple exchanges with different 

trading models. Accordingly, to be effective, these innovations may require the suspension or 

termination of UTP.10 UTP permits securities listed on any national securities exchange to be 

 

124(3) J. FIN. ECON. 486 (2007) (finding that stock liquidity reduces firm default risk by improving stock 

price informational efficiency and facilitating corporate governance by blockholders).

7 See Securities and Exchange Commission, Division of Trading and Markets, Staff Background Paper on 

the Market Structure for Thinly Traded Securities (October 17, 2019), available at

https://www.sec.gov/rules/policy/2019/thinly-traded-securities-tm-background-paper.pdf (“Staff 

Background Paper”).

8 As discussed further below, market participants have suggested, for example, heightened market making 

obligations and market making incentives, periodic intraday auctions, non-automated auctions, and 

indicative quoting.

9 Pursuant to the Congressional Review Act, the Office of Information and Regulatory Affairs has designated 

this policy statement as not a “major rule,” as defined by 5 U.S.C. 804(2). See 5 U.S.C. 801 et seq.

10 The Commission understands that the suspension or termination of UTP may have effects on intermarket 

competition and, as noted below, welcomes comment on this matter and other matters raised in this 

Statement.
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traded by other such exchanges.11 Currently, UTP is automatically extended to a security once it 

begins trading on the listing exchange.12 Similarly, some market structure innovations related to 

improving markets for thinly traded securities may require relief from certain Regulation NMS 

or other Exchange Act rules to be effective. Therefore, for thinly traded securities, the 

Commission is interested in considering proposals for market structure innovations in 

conjunction with the potential suspension or termination of UTP and/or the possibility of 

exemptive relief from Regulation NMS and other rules under the Exchange Act.13

A number of suggested market structure approaches to improve liquidity for thinly traded 

securities were raised at the Roundtable and elsewhere. One approach that has been suggested is 

that an exchange could provide market makers with incentives to assume heightened market 

making obligations for thinly traded securities.14 The concern expressed is that market makers 

may lack adequate incentives to quote, especially with significant order interest, at or inside the 

displayed best bid or offer in thinly traded securities, particularly during periods of increased 

volatility. Increased incentives to be in—and stay in—the markets for these securities could 

encourage market makers to quote more frequently and in greater size, which in turn could lead 

 11 15 U.S.C. 78l(f).

12 See Securities Exchange Act Release No. 43217, 65 FR 53560 (September 5, 2000) (eliminating the oneday waiting period for exchanges to extend UTP to listed IPOs).

13 Exchanges may submit market structure innovation proposals as rule filings in accordance with Section 

19(b) of the Exchange Act and the rules thereunder. See 15 U.S.C. 78s(b). An application to suspend or 

terminate UTP for thinly traded securities under Section 12(f) of the Exchange Act and the rules thereunder 

may be submitted to the Commission. See 15 U.S.C. 78l(f). Requests for exemptive relief from Regulation 

NMS or other rules under the Exchange Act for thinly traded securities may also be submitted to the 

Commission. See 15 U.S.C. 78mm(a). To the extent non-exchanges would like to recommend market 

structure innovations, those recommendations may be submitted to File Number S7-18-19 for this 

Statement.

14 See, e.g., Transcript, supra note 3, at 49, 150-52, 192-93. For example, in the past, human market makers 

such as New York Stock Exchange specialists were the exclusive market makers in a range of allocated 

securities (including those that were thinly traded and actively traded) and, as a result, had more 

comprehensive information about the trading interest in those securities that facilitated their ability to meet 

heightened affirmative and negative obligations and incentivized their quoting activity.
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to narrower spreads and increased displayed order interest. An exchange might also explore 

ways to incentivize market makers to provide additional liquidity not only during normal market 

conditions, but also during times of market stress when liquidity in these securities can become 

even scarcer.

Others have suggested that an exchange could implement periodic intraday auctions as a 

means of concentrating liquidity in thinly traded securities at times other than solely at the 

market open and market close.15 To the extent that liquidity in these securities does not 

efficiently coalesce when traded across multiple equity exchanges in intervals of microseconds, 

such an approach might facilitate more efficient order interaction and price formation by 

concentrating liquidity at one exchange and at distinct time intervals during the trading day.16 

Doing so may help to resolve difficulties that market participants currently have in finding 

contra-side liquidity, particularly for larger-size orders.

Another market structure change that has been suggested to help improve liquidity is the 

introduction of non-automated markets for thinly traded securities.17 Such an approach could 

enable an exchange to offer a negotiated market (i.e., a market that would permit buyers and 

sellers to communicate directly to determine an agreed upon price), whether for thinly traded 

 15 See, e.g., Yakov Amihud, Haim Mendelson & Beni Lauterbach, Market Microstructure and Securities 

Values: Evidence from the Tel Aviv Stock Exchange, 45 J. FIN. ECON. 365 (1997) (noting that adding 

additional auctions to the trading day on the Tel Aviv stock exchange was associated with an increase in 

liquidity and that some European stock exchanges already include an intra-day call auction where 

continuous trading is paused for a period while a call auction is performed). See also Transcript, supra

note 3, at 137; Nasdaq Application to Permit Issuer Choice to Consolidate Liquidity by Suspending 

Unlisted Trading Privileges (April 25, 2018), available at https://www.sec.gov/comments/265-31/26531-

3515735-162293.pdf, at 5.

16 See, e.g., Robert Schwartz & Reto Francioni, Call Auction Trading, Encyclopedia of Finance 477 (2013) 

(stating that “[t]he electronic call auction is appealing for small and mid-cap stocks because order batching 

augments the efficiency of liquidity provision by focusing liquidity at specific points in time” and that 

“[f]or securities with little liquidity and less frequent trading, one or two calls per day may suffice.”).

17 See, e.g., Transcript, supra note 3, at 79, 124, 149-52. See also id. at 26 (discussing the lack of negotiated 

trading on exchanges).
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securities orders generally, or for larger-size orders more specifically. Such a negotiated market 

might address certain liquidity challenges that fully continuous markets pose to thinly traded 

securities (e.g., the increased risk of “missing the market” when displaying an order).18 A 

related approach might be for an exchange to allow more informative indicative quoting19 in 

thinly traded securities as opposed to requiring firm quoting (again, whether as a general matter 

or for larger-size orders), to facilitate trade negotiation and incentivize market maker 

participation.

The Commission notes that these potential market structure changes are merely a few 

examples of the types of innovations that exchanges and other market participants could consider 

developing that might facilitate improved trading in thinly traded securities. This list is not 

intended to be exhaustive or to limit the possibilities market participants could consider. The 

Commission encourages exchanges and other market participants, including issuers, to explore 

various types of market structure innovations to address the liquidity challenges in trading these 

securities.

B. Invitation for Proposals to Address the Market for Thinly Traded Securities

To better facilitate secondary market trading in thinly traded securities, one possible 

approach is for a national securities exchange that lists thinly traded securities to consider 

submitting a proposal focused on enhancing the market structure for these securities. To the 

 18 This situation arises, for instance, when a displayed order is posted to a continuous market. The displayed 

order signals a buy or sell intention to the market, but instead of the displayed order being filled, a separate 

trade occurs either at or slightly better than the initially displayed price. Because the market consequently 

moves away from the initially displayed price, the initial posted order goes unexecuted. See also Staff 

Background Paper, supra note 7, at 12 (describing the Roundtable discussions of the difficulties in filling 

orders).

19 See, e.g., Transcript, supra note 3, at 80-81 (stating that indications of interest currently often are static or 

stale). An indicative quote is an expression of interest to transact designed to attract the contra side of the 

trade but that is not a firm quote.
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extent a listing exchange would like to submit a proposal for an innovation that incorporates or 

depends on the suspension or termination of UTP, such an exchange could apply for the 

suspension or termination of UTP pursuant to Section 12(f) of the Exchange Act so that these 

securities that an exchange lists would no longer trade on other national securities exchanges.20 

As necessary to implement its proposed innovations, an exchange could submit requests for 

exemptive relief from Regulation NMS or other Exchange Act rules.21 The Commission 

recognizes that market structure changes may not address all of the challenges faced by issuers 

whose securities are thinly traded. But to the extent that the current secondary market

requirements could be tailored to better serve thinly traded securities without negatively affecting 

trading as a whole, the Commission is interested in evaluating proposals that listing exchanges 

may submit. The Commission notes that market structure changes to improve trading in thinly 

traded securities could have implications for the broader market structure. The Commission 

encourages any proposal to address these potential broader market structure effects. In addition, 

the Commission expects any proposal to demonstrate how it would satisfy any relevant statutory 

requirements including, for example, Section 6, Section 11A, and Section 12 of the Exchange 

Act.22 The Commission would evaluate any proposals pursuant to such relevant statutory 

requirements.

To facilitate the Commission’s evaluation, it would be helpful for a proposal to address 

certain considerations. For example, a proposal should define what “thinly traded security” 

means, whether based on average daily trading volume, number of trades, share volume, or 

 20 See 15 U.S.C. 78l(f).

21 At this time, the Commission’s initiative is focused on encouraging on-exchange innovation for thinly 

traded securities and is not intended to address OTC trading of these securities.

22 See 15 U.S.C. 78f, 15 U.S.C. 78k-1, and 15 U.S.C. 78l, respectively.
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dollar volume, potentially combined with additional factors such as market capitalization, 

number of shareholders, or public float. Such proposals should also include an explanation of 

how the thresholds were set, including any relevant data and analysis.

The proposal should address whether all securities that meet a chosen threshold test are 

included in the tier, or whether listed companies may opt in or out. If listed companies may opt 

in or out, the proposal should also address how the benefit of this mechanism justifies the 

potential additional operational complexity this may impose on NMS market participants.

To the extent relevant, the Commission encourages exchange proposals that involve the 

suspension or termination of UTP to address: (1) steps that might be taken to enhance the 

technological resilience of its new trading tier in light of the greater dependence of market 

participants on a single exchange; and (2) business continuity plan(s) in the event of the failure 

of an exchange’s systems that would affect trading in, and required quote and trade information 

dissemination regarding, the thinly traded securities.

The Commission encourages all proposals to address: (1) how and when a security 

would begin trading in the thinly traded security tier, and how it would transition out of the tier if 

that security no longer qualifies for trading in the tier; (2) how the exchange would address NMS 

Plan market data revenue allocation for any thinly traded securities not subject to UTP; and (3) 

the data the exchange would collect and make available and the data analysis it would conduct to 

enable an assessment of the success of the proposal. 23 A proposal also could consider the 

collection and sharing of data to measure the market-wide effects of: (i) limiting trading of the 

 23 In so doing, an exchange could consider describing how it could evaluate the success of a proposal, 

including: (i) the data that could be collected; (ii) the testing and comparative analysis based on specified 

metrics that could be conducted to determine the effectiveness of the program; (iii) an explanation of the 

statistical approach it could employ in its testing and comparisons; and (iv) the empirical analysis it could

perform.
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affected securities to a single exchange, including any market quality benefits or costs that may 

result from consolidating the liquidity pool; (ii) relief from Exchange Act rules that restrict the 

ability of exchanges to innovate beyond the fully continuous market models that exist today; and 

(iii) any other innovative market structure modifications. The Commission welcomes comments 

on matters addressed in this Statement, including any potential effects on intermarket 

competition for listing and trading thinly traded securities, as well as related potential effects on 

market transparency and the protection of investors.

The Commission looks forward to engaging with exchanges that list and trade thinly 

traded securities, market participants involved in this segment of the equities market, including 

issuers, investors, and others to facilitate market structure innovations that can meaningfully 

improve secondary market trading for these securities.

By the Commission.

October 17, 2019

Eduardo A. Aleman

Deputy Secretary