The Penny Quoting Rule

There were relatively recent regulations passed by the SEC for fully electronic stock markets. The most important one was known as "Regulation NMS".

The NYSE excels at lobbying the State for favors. Naturally, the regulations were written in a way that favor the NYSE and other large stock exchanges. Small ECNs are squeezed out of the market.

There's a mandate for automatic electronic executions. However, there is no standard for time. An ECN can reply to a trade in milliseconds. The NYSE can take as long as a second. There is a "trade-through rule". The ECNs are barred from trading through the NYSE's quote, but the NYSE takes a relatively long time to process orders. The "speed advantage" that ECNs offer their customers is frustrated by the trade-through rule. If the NYSE offer is $10.00 and the ECN offer is $10.01, a customer can't choose to execute immediately on the ECN for $10.01. Their order must first be routed to the NYSE, which is slow, and only then can an order be routed to the ECN. While the NYSE is processing the order, the market price can move and the customer gets no execution at all.

Another element that favors the NYSE is the "penny quoting rule". For a stock priced more than $1, all quotes must be in multiples of $0.01. This effectively mandates a minimum spread size of $0.01. This also prevents fast ECNs from circumventing the NYSE's slowness. If the NYSE posts an offer for $10.00, then an ECN can't post an offer for $9.999 and circumvent the NYSE.

The SECs "electronic exchange regulations" are written in a way that favors large exchanges like the NYSE over ECNs. As usual, State regulations protect large businesses and crush smaller competitors. The NYSE receives an advantage from its size and established market position because it can successfully lobby the State for favors.