The Sub-Penny Rule
SEC Rule 612, which bars most U.S. stocks from being quoted in increments smaller than a penny, and why it shapes where price improvement can happen.
Rule 612, adopted under Regulation NMS in 2005, prohibits market participants from displaying, ranking, or accepting quotes in U.S. stocks priced at $1.00 or more in increments smaller than one cent. A market maker cannot post a bid of $50.001 to jump one-tenth of a cent ahead of a competitor quoting $50.00 — the smallest allowed step is a full penny.
The rule exists because sub-penny quoting was being used as a queue-jumping tactic: without it, a trader could gain time priority over a resting order by improving the price by a fraction of a cent, effectively free-riding on the original order's price discovery while offering almost no real economic improvement. That undermines the incentive to post displayed liquidity in the first place.
Sub-penny pricing is still allowed in two places: stocks trading below $1.00, where the tick can be as small as $0.0001, and in off-exchange trades — a wholesaler internalizing retail flow can execute at $50.0015, splitting the penny as price improvement, even though it could never have quoted that price on an exchange. That asymmetry is part of why so much retail order flow is routed off-exchange rather than to a lit market.
The sub-penny rule keeps displayed, quoted prices on U.S. exchanges rounded to the cent, but off-exchange executions can still land between pennies — which is why wholesalers can offer retail traders fractional-cent price improvement that never appears on the public quote.
Further reading
- SEC, Regulation NMS, Rule 612 (2005)