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Nasdaq floats trading changes that may lead investors to save up to $1B annually

Nasdaq Inc. is proposing to abandon the one-size-fits-all structure that has determined for the past two decades how much investors can bid on a stock in the U.S.

The New York-based exchange operator has released a proposal to install an intelligent tick regime that it says would provide investors with annual cost savings of anywhere between $100 million and $1 billion by tightening spreads, meaning the difference between the lowest amount a seller is willing to accept for a security and the highest amount a buyer will accept for it.

Within its proposal, Nasdaq suggests that the amount a stock can be quoted by should fluctuate based on the given security's quoted spread. That would represent a significant detour from the current standard in the U.S. where any stock — whether worth $1.50 or $1,500 — can be quoted in 1-cent increments so long as it is worth more than a dollar. Stocks valued at less than $1 can be quoted in increments smaller than a penny.

"There's an obvious way to make the market structure better, and that is to put ticks back to more consistent economic levels," Nasdaq Chief Economist Phil Mackintosh said in an interview. "Of all the issues that are out there, this is the one that has the best chance of a consensus opinion."

Nasdaq specifically proposed that stocks would trade in one of six tick-size buckets ranging from 0.5 cent to 25 cents, based on its average duration-weighted quoted spread. That means that investors would be able to bid to buy or sell stocks like Inc. and Alphabet Inc. in increments of a quarter, while stocks like Apple Inc. and The Walt Disney Co. would be traded by multiples of a penny.

Intelligent tick sizes are used in a number of markets around the world, including Japan and Hong Kong. However, the U.S. has been tied to its uniform tick size of 1 cent since the early 2000s when stocks were dealt primarily by humans rather than algorithms. That structure has proven to raise costs and complexities for trading both low- and high-priced stocks, though, according to Nasdaq, which has pushed for a more flexible tick structure for years. The one-size tick in the U.S. can cause wider spreads, Nasdaq said.

Those problems are only worsening as the average price of stocks continues to rise given a lack of stock splits in recent years, exacerbating the inefficiencies stocks are seeing as a result of the 1-cent tick size they still trade at, according to the exchange.

"A smarter approach to tick sizes — which has already been adopted in markets outside the U.S. — will lower costs for investors and reduce complexity," Tal Cohen, Nasdaq's executive vice president for market services in North America, said in a statement.