Without the SEC protecting their monopoly, market makers and specialists could no longer extort their middleman cut from every trade, causing spreads and transaction costs to collapse. Instead of paying an oversized market maker spreads, investors themselves became the market.
Unmolested by market makers, investors enthusiastically welcomed the new market efficiencies and trading volume surged from millions to billions of shares a day.
Let's examine the total cost of two transactions. Example one, you purchase 1,000 shares in a stock with a penny spread (bid $10 and ask $10.01). You could post a bid for $10 and hope someone else will "hit" your bid, resulting in a cost of $1,000. Your other choice is to pay the spread, and your total cost is $1,010. Not a substantial difference; that's the power of having a level playing field.
In the second example, the SEC limits retail investors (but not market makers) to bid or ask increments of 10 cents. The spread is now bid $10 and offering $10.10. The result is you're still allowed to bid $10, but you will only get filled if the market "moves through you" (offer falls below your bid).Investors quickly realize they are in a no win situation and pay the SEC-required spread to the market maker. Your total cost as a result of a minimum 10-cent spread is $1,100, instead of $1,010. The spread, not commissions, play the larger influence in your investment results. You won't get an order fill because market makers and brokers offer "price improvement" of one-tenth of a cent, resulting in trades near $10.011 while your bid sits there unexecuted. Sub-penny transaction pricing is designed to place retail investors at a competitive disadvantage compared to Wall Street insiders. Retail investors aren't allowed to trade in less-than-a-penny increments. Insiders figured out if they could get the SEC to prohibit retail investors from offering as small of increments as them, they could "front-run" retail orders by only paying one-tenth of a penny difference. The idea was sold to the SEC by calling it "price improvement", but don't kid yourself, market makers and insiders aren't looking out for retail investors (if you believe they are, I have ocean-front property in Wisconsin for sale), they wanted order priority, and the SEC gave the green light to jump in front of retail investors by paying just a fraction of a penny. Retail investors were no longer on a level playing field once the SEC gave the green light to jump in front of retail investors by paying just a fraction of a penny. But that's not enough. What market makers genuinely want is to go back to when they could extract a little blood from each investor for every transaction. By combining the ability to jump in front of retail investors with a sub-penny price "improvement" and a minimum 5 or 10 cent spread, the de facto result will be a return to retail traders who are no longer able to cut out the middleman and will have to pay a "fee" to market makers.