Robinhood wants the SEC to allow sub-penny pricing on exchanges.
The current Sub-Penny Rule (SEC Rule 612) does not allow exchanges to quote in increments less than a penny. That can cause artificially wide spreads on the National Best Bid and Offer for certain stocks. This means exchanges can't compete with market makers, Robinhood notes. Robinhood suggests price increments of up to four decimal places for all stocks.
This problem is worse for low-priced stocks because, for example, a 1-cent spread for a $1 stock is a big portion of the share's value. Many of the top 25 traded stocks by volume are priced at $5 or less. For example, Sundial Growers, the fourth most-traded stock, trades at $1.0050.
As a result, many exchange investors will go off exchanges to invest in these stocks, according to an investor familiar with the matter.
A change that would allow sub-penny increments would ultimately benefit retail investors, because the NBBO spread would be tighter, resulting in better prices for retail investors, Robinhood writes.
In 2019, Nasdaq proposed a detailed "intelligent tick size" system in which "no tick would be wider than a stock's average quoted spread".
Citadel's Ken Griffin at the Congressional hearing on GameStop also brought up the sub-penny issue, reiterating Citadel's support of smaller tick sizes on exchanges — despite market makers' current advantage on the issue.