Why the SEC is allowing some stocks to trade in half-cent increments

This week, the Securities and Exchange Commission announced a new rule that will affect how stocks are priced. Specifically, it’ll allow many popular stocks to trade in half-cent increments.

Right now, stocks are priced in increments of a penny, but the SEC’s goal is to make stock prices more competitive.

Every time stocks are bought and sold, there’s always a third party that makes the trade happen.

“There’s a market maker — somebody who’s providing the liquidity in that market, who’s connecting the buyers and the sellers,” explained Evan Rawley at the University of Connecticut.

That market maker gets a cut of every trade by giving the seller of a stock a little less than what the buyer pays, he said. The cut can vary depending on how hard it is to match a buyer and a seller.

But for popular stock trades? That cut is often the bare minimum: a penny.

“That doesn’t seem like too much,” said Rawley. “But there are a lot of trades that are going at the minimum. That means that probably the minimum could be lower.”

The Securities and Exchange Commission argues that by allowing popular stocks to trade in half-cent increments, transaction costs will fall.

While individual investors might not notice a difference, “a half penny here, a half penny there across millions of investors and millions of trades is what adds up to considerable savings for retail investors,” said Thomas Ernst, an assistant professor of finance at the University of Maryland.

The SEC’s new rule will take effect in November of next year.