Citadel Securities has published a new whitepaper outlining its view that eliminating the one-penny minimum quoting increment could have “negative” and “unintended” consequences for the market.
It follows a whitepaper by the market maker in May last year that suggested a reduction in the minimum quoting increment to a half-penny for tick-constrained stocks could alleviate concerns that exchanges were struggling to compete with off-exchange venues for retail flow. Citadel Securities argued such a reduction for tick-constrained stocks would encourage participants to quote a tighter spread.
However, other participants have made the more drastic suggestion of reducing the increment for all stocks regardless of whether they are tick-constrained, arguing that this creates a level playing field for on- and off-exchange venues.
Citadel Securities’ new whitepaper has instead laid out the argument using public 605 data that even when unconstrained by the one-penny quoting rule, participants on exchanges do not quote or execute at prices that are as good as what can be achieved by wholesalers filling retail orders.
“Proponents claim that exchanges cannot compete with off-exchange venues because of the latter’s ability to execute “in-between the ticks,” whereas exchanges cannot, thus creating an unlevel playing field,” said Citadel Securities in the report. “However, our analysis demonstrates that there is no benefit to smaller tick increments for stocks with spreads wider than a few pennies.”
The market maker added that any changes to quoting increments might not necessarily even result in exchanges offering more competitive pricing.
Citing the SEC’s approval of the NYSE RLP program, Citadel Securities added that widespread sub-penny quoting could lead to negative and unintended consequences including flickering quotes, higher trading costs, reduced liquidity and further fragmentation in the securities markets.