Sub-Penny Internalization

Minimum Tick Size Arbitrage

Audited by Cole Barrett • Topic: Sub-Penny Internalization
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Cole Barrett's Reality Check

The Unvarnished Bottom Line

"Lit exchanges like the NYSE are locked into penny increments: you can bid $50.00 or $50.01, but you cannot bid $50.0001. Wholesale internalizers don't have that restriction. When a retail order arrives, the internalizer steps ahead of the lit exchange queue by 1/100th of a penny. They jump the line, capture the trade, and collect the spread while public exchange limit orders sit waiting."

Interactive Simulator: Test the Math

Interactive Simulator: PFOF Arbitrage Drag

Shares Traded Per Month 2,000 Shares
Estimated Fill Slippage Cost
$40.00 / mo
Sub-optimal fill slippage
Wholesaler Extraction
$480.00 / yr
Sunk annual cost

Real-World Example: Scenario Breakdown

Examining the real numbers for: Retail customer market buy order for 1,000 shares of stock (Lit NBBO: $20.00 Bid / $20.01 Ask)

Execution Metric Resting Public Lit Limit Bid (Rule 612 Compliant) Off-Exchange Wholesale Internalizer
Fee / Rate $1.00 fee $0.00 internal
Spread / Buffer Rested displayed buy order at $20.00 (Cannot legally quote $20.0001) Bought incoming retail sell order off-exchange at $20.0001
Execution / Status Internalizer jumped ahead of lit bid on off-exchange book Stepped ahead of public lit book by 1/100th of a cent
Total Cost / Result Denied execution priority due to statutory tick rules Captured sub-penny spread arbitrage without competing on lit bourses

How Brokers Weaponize This Term

Wholesale market makers lobby against expanding sub-penny quoting to lit public exchanges, preserving off-exchange tick size disparities that allow internalizers to capture non-directed retail order flow.

Broker Evaluation Matrix

Cole Approves

Interactive Brokers: SmartRouting engine routes directly to lit exchanges and midpoint pegged facilities to capture genuine sub-penny price improvement for customers.

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Cole Flags / Avoids

PFOF Mobile Brokers: Routes 100% of non-directed retail equity orders to wholesale internalizers that monetize tick-size regulatory arbitrage.

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Frequently Asked Questions

What regulation establishes the US minimum tick size rule?

SEC Regulation NMS Rule 612 (the Sub-Penny Rule) mandates a $0.01 minimum quoting increment on lit exchanges for securities priced at $1.00 or more.

Why did the SEC propose updating the Sub-Penny Rule in recent years?

To allow lit exchanges to quote in half-penny or sub-penny increments on liquid stocks, leveling the playing field between public exchanges and off-exchange wholesale internalizers.