In a coordinated market‑structure filing this week, several U.S. options exchanges proposed increasing minimum tick sizes for low‑priced contracts — commonly called "penny options" — in a change that could materially alter liquidity in single‑stock and ETF weeklies.
What the proposal would change
The exchanges' filing requests authority to set a larger minimum price increment for options whose midpoint price is below $0.20. Under the proposal, the current $0.01 tick for those contracts would be replaced with a wider increment — proposed at $0.05 for most impacted strikes — while leaving higher‑priced series at $0.01 increments.
Exchange documents accompanying the filing argue the change aims to "simplify order‑routing and quoting behavior, reduce excessive quote traffic, and align incentives for liquidity provision in ultra‑low price contracts." The exchanges say a wider tick could improve displayed quote stability and reduce fleeting, sub‑penny changes that add processing load for market makers and brokers.
Scope and timeline
- The change would apply to single‑name equity and ETF options with midpoint prices under $0.20 — a universe that disproportionately includes short‑dated weeklies and deep‑out‑of‑the‑money series.
- Exchanges are seeking public comment over the next 21–45 days and will submit the rule change to the SEC for approval if the comment period does not yield material revisions.
- If approved, exchanges expect to phase the change in over several months and to coordinate implementation dates to limit fragmentation across trading venues.
Why traders care: spreads, execution and strategy
Options traders and liquidity providers say a larger tick for penny contracts will push quoted and filled spreads wider in affected strikes, increasing explicit costs for many short‑duration strategies.
"For calendar spreads, debit spreads and many directional plays that use weeklies, widening the minimum increment from $0.01 to $0.05 is a meaningful increase in friction," said a market‑structure quant who asked not to be named. "That fivefold jump in granularity effectively raises the minimum visible spread to 5¢, which can be 25–100% of the option premium in some weeklies."
Examples traders cited: a SPY weekly out‑of‑the‑money option trading at $0.08 today could see quoted spreads widen from 1–2¢ to 5–10¢, materially increasing slippage for small, high‑frequency retail executions and for professional strategies that rely on tight tick granularity.
Potential reflow of liquidity
Market‑making desks say they could respond by concentrating liquidity in slightly longer expiries and at wider strikes where the economics of quoting are improved. "If the tick becomes wider on the cheapest series, you may see a natural reflow to the $0.20–$0.50 band or to monthlies where spreads remain in pennies," said an equity options market maker. "That reduces competitive pressure on spreads, but it also reduces tradable depth at those one‑ or two‑leg plays many retail traders use."
Exchanges' rationale and counterarguments
Exchanges highlight operational efficiencies as a core justification. According to their filing, many firms spend excessive computing resources processing ultra‑fine quote updates and sub‑penny order adjustments on contracts that yield negligible execution value. By enlarging ticks, exchanges argue, they can lower messaging load and improve quote stability for all venues.
Critics counter that the change disproportionately raises costs for small traders and active retail flows that generate order flow revenue for brokers and market makers. Public interest groups and some retail brokerages are likely to argue during the comment period that tighter increments promote competition and narrower spreads, especially on liquid ETFs and widely traded single names.
Regulatory considerations
The SEC will consider whether the proposal promotes fair and orderly markets and whether the benefits to market integrity outweigh higher transaction costs for certain participants. Historically, changes to tick structure have provoked detailed economic analysis and voluminous public comment; regulators will likely ask exchanges for empirical evidence showing the net benefit across diverse market participants.
Practical implications for options traders
- Reprice trading models: Market‑makers and quant traders should re‑calibrate execution and quoting algorithms to account for coarser strike increments and expected spread widening in affected series.
- Review strategy costs: Traders running small‑ticket, short‑dated strategies (single‑leg buys, credit spreads, short calls near the money) should recalculate breakevens and slippage under a 5¢ minimum tick.
- Consider alternative expiries: If weeklies thin out, traders may shift to monthlies or staggered expiries to capture thinner implied volatility and depth.
- Watch for fee changes: Exchanges often pair market‑structure changes with fee‑schedule tweaks; keep an eye on maker/taker and taker fees which could offset or amplify the impact of wider ticks.
What to watch next
Traders should watch the formal comment filings once the exchanges’ proposal posts on the SEC’s rule‑making docket. Key milestones include the close of the public comment period, any substantive revisions by exchanges, and SEC staff feedback. Industry groups — including broker‑dealers, market‑making firms and retail advocacy organizations — are expected to submit data‑driven responses that will shape the regulator's review.
For options traders, the immediate step is to model the change’s direct effect on commonly traded series in your workflow and to prepare for potential migration of liquidity into slightly different expiries and strikes.