While international trade, tariffs and dollar dominance may now be preoccupying risk managers and strategists, let us not lose sight of financial market matters: the U.S. Market Data Infrastructure Rules (MDIR); Minimum Pricing Increments (a.k.a. Tick Size), Access Fees, and Transparency of Better Priced Orders (TBPO) that are set to be implemented in November 2025; and Odd Lot information to be included by May 2026.
Risk and compliance managers should not procrastinate in understanding changes that will affect their risk controls, volatility management, surveillance, duties to fulfill Rule 605 best execution and Rule 606 order routing disclosure requirements, and more.
Like throttle and brakes, controls ought to be embedded in the design, system and operational adjustments. They should correctly process the expanded contents and cater to latency improvement. The definition of “core data” will be expanded to include: quotation sizes; aggregate quotation sizes; best bid and best offer; national best bid and national best offer; protected bid and protected offer; transaction reports; last sale data; odd-lot; depth of book data; and auction information.
Kelvin To of Data Boiler Technologies
Most investment firms (IFs) are enthusiastic to get “five levels of depth” from the Securities Information Processors/Competing Consolidators (SIPs/CCs).
Notable changes include a “40 shares” tier to the total four-tiered definition of “round lot.” Quotation sizes will be represented by the number of round lots. Core data elements will instead be disseminated by SIPs/CCs in share sizes, rounded down to the nearest round-lot multiple.
The new definition of round lot under MDIR and the amended tick size under TBPO will complicate the computations of best bids and offers (BBOs). The SEC acknowledged the national BBO implications, while expecting benefits such as narrower spreads on National Market System (NMS) stocks with an average closing price over $250 per share.
Why the Upheaval?
Risk and compliance managers may question the regulatory purpose of such cumbersome changes to market data and market structure, causing the industry to scramble with process and system upgrades.
First, let’s remember the SIPs and data vendors, who plan to register as CCs under MDIR, are charged with having to provide a truly reliable source of trade sequence to best represent supply and demand. Improving market integrity and transparency is an honorable goal.
There is no denying that risk limits and other parameters will need to be adjusted. Many nuances have been reviewed and thoroughly considered by the SEC to prevent potential exploitation and balancing different stakeholders’ needs (e.g. institutional versus retail, lit versus other trading venues, etc.) in the markets. For example, TBPO requires that odd-lot information to include a best odd-lot-orders (BOLO) to buy and sell (BOLO).
Regarding tick size, implementation of TBPO will permit self-regulatory organizations (SROs), alternative trading systems (ATS), vendors and broker-dealers to display, rank and/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: “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.”
The three-month evaluation period (e.g., January-March, July-September) has a one-month lag for tick and round-lot tier assignment; thus the six-month operative period from May to October, and from November to April.
The SEC expects spreads will be reduced for these NMS stocks (approx. 58% of daily trading volume, or 43% in dollar volume). If the TWAQS exceeds $0.015, the minimum tick size remains at $0.01.
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.”
Order Protection
With respect to the Order Protection Rule, the new round-lot NBBO will be protected, other order protection requirements in Rule 611 and the prohibitions on locked, and crossed markets in Rule 610(d) will be expanded under the MDIR and TBPO. The SEC has a partial stay of the amendments that require “the primary listing exchange to provide an indicator . . . of the applicable minimum pricing increment . . . under the definition of regulatory data” and reduction in access-fee cap.
The SEC did anticipate the need for “distinct product changes” affecting “literally hundreds of exchanges, vendors and subscribers, each with different development priorities and system capabilities” along with the need for customer and investor education – hence the BOLO compliance date is pushed to May 2026.
There are a few caveats. “BOLO may serve as the benchmark execution price for execution quality statistics in rule 605 reports,” while the TBPO footnote also states, “the Commission . . . is NOT setting forth minimum data elements needed to achieve best execution,” described as “a supplement to, rather than a replacement for, price improvement statistics.”
In addition, “non-automated quotation” is excluded in core data with respect to protected bid or offer. Auction information will be included in core data under MDIR; IFs are not obligated to consume it, i.e. subscription is optional.
The SEC believes that “order imbalances and indicative prices help market participants determine whether to participate in auctions,” where a 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.
Number of Price Points
Overall, the changes are comprehensive around a single theme – increasing NBBO refresh rates with tighter spreads. I have said in the past, artificially altering the queue, the equal of a waiting line at checkout counters), may affect the “apparent,” not the real, supply and demand for securities.
Hubert DeJesus of BlackRock shared this insight during a 2022 SIFMA roundtable: When the number of price points is reduced, more liquidity aggregates at those price points. “But when the number of price points is increased, then it is essentially fragmenting the quote and dispersing liquidity across multiple prices.”
Broker-dealers will have the choice to use the exchanges’ proprietary products (PPs), the SIPs, CCs, or a mix of these as their benchmark execution policy standards. Depending on the SIPs/CCs increasing their bandwidth to cater for the additional data, some degree of data fragmentation will happen under a decentralized consolidation model, and benchmark reference-price arbitrage will persist due to multiple-NBBOs.
How Speed Matters
The SEC did consider the outbound message traffic. 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” Going fast by traveling light is how the SIPs can catch up to the PPs.
To curb exchanges from optimally restricted access to price information, MDIR “requires SRO to provide . . . to all CCs and self-aggregators in the same manner and using the same methods . . . as such SRO makes available any information to any other person.”
While 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, where an ESMA spokesperson recently declared that the “tweaked execution policy standards will not rely on the Consolidated Tape to enforce consistency” (in essence implying the EU tape is not offering a real usable best bid and offer).
Nevertheless, risk managers should observe the excessive intermediation phenomenon. High-frequency, proprietary traders are generally better able to obtain priority to profit off spread when the marketable orders filled are small, and consequently investors may have less opportunity to profitably fill their trades using limit orders. Meanwhile, data centers rent-seek 24x7, exchanges maximize money-making hours and make strategic location moves that present new opportunities and challenges.
The impending changes are humongous, despite downplaying by the SEC (“only” 134 stocks priced over $250 will be assigned to a round lot size less than 100). Do not delay in conducting a thorough risk assessment to be on top of these new market dynamics as a result of regulatory changes, plus related system and operational adjustments.
Kelvin To (kelvin.to@databoiler.com) is a big data and financial technology platform innovator and founder and president of Data Boiler Technologies.
Topics: Financial Markets
