Rule 612 (Sub-Penny Rule)
Rule 612 of Regulation NMS, also known as the Sub-Penny Rule, prohibits market participants from displaying, ranking, or accepting quotations in NMS stocks that are priced in increments smaller than 1.00, and smaller than 1.00.
Core requirements and purpose
Rule 612 was implemented by the SEC as part of Regulation NMS to address market structure concerns around sub-penny pricing. The rule aims to:
- Prevent excessive quote flickering
- Reduce the ability to step ahead of displayed orders by economically insignificant amounts
- Maintain orderly markets by establishing minimum price increments
- Support fair and efficient price discovery
Market impact and implications
Order display and ranking
The rule directly affects how exchanges and Alternative Trading Systems (ATSs) handle order pricing:
Trading behavior effects
The Sub-Penny Rule has significant implications for:
- Market Microstructure - Defines fundamental price grid
- Queue priority - Prevents sub-penny stepping ahead
- Tick Size economics - Establishes minimum economic increment
- Liquidity provision - Affects market making strategies
The Sub-Penny Rule is fundamental to modern market structure, establishing clear minimum price increments that help maintain orderly markets while preventing excessive fragmentation of liquidity.
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Exceptions and special cases
While Rule 612 prohibits sub-penny quoting, certain exceptions exist:
- Midpoint executions
- Retail price improvement programs
- Benchmark executions
- Trade reporting of sub-penny executions
Impact on trading systems
Trading platforms must implement specific controls to comply with Rule 612:
Pre-trade validation
- Price increment validation
- Order rejection logic
- Quote normalization
Market data processing
- Price formatting requirements
- Display protocols
- Market Data Feed Handlers configuration
Modern market considerations
The rule continues to be debated in the context of:
- Increasing automation and High-Frequency Trading
- Market fragmentation
- Tick size pilot programs
- Retail trading innovation
- Digital asset markets
Regulatory context
Rule 612 operates alongside other key regulations:
- Rule 611 (Order Protection Rule)
- Rule 603 (Market Data Distribution)
- MiFID II tick size regime (international context)
The rule remains a cornerstone of modern market structure, though its applicability continues to be examined as markets evolve and new asset classes emerge.