The Securities and Exchange Commission has approved a proposal by the national securities exchanges and the Financial Industry Regulatory Authority for a two-year pilot program that would widen the minimum quoting and trading increments, known as tick sizes, for stocks of some smaller companies. The SEC plans to use the pilot program to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors.
The SEC modified several provisions of the proposal submitted by the exchanges and FINRA to address concerns raised during the public comment process. Among those changes, the SEC extended the pilot program to two years rather than one, removed the venue limitation from the trade-at prohibition that would have required price matching executions to occur where the person’s quotation was displayed, and reduced the size of block transactions eligible for the exception to better reflect trading in smaller-cap stocks.
The tick size pilot program—slated to begin by May 6, 2016—will include stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less, and a volume weighted average price of at least $2 for every trading day.
The pilot will consist of a control group of approximately 1,400 securities and three test groups with 400 securities in each selected by a stratified sampling. During the program:
Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share and will trade at the currently permitted increments.
Pilot securities in the first test group will be quoted in $0.05 minimum increments but will continue to trade at any price increment that is currently permitted.
Pilot securities in the second test group will be quoted in $0.05 minimum increments and will trade at $0.05 minimum increments subject to a midpoint exception, a retail investor exception, and a negotiated trade exception.
Pilot securities in the third test group will be subject to the same terms as the second test group and also will be subject to the “trade-at” requirement to prevent price matching by a person not displaying at a price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies. In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions that mirror those under Rule 611 of Regulation NMS will apply.
A variety of data generated during the tick size pilot will be released publicly on an aggregated basis to assist in analyzing the impact of the wider tick sizes. The exchanges and FINRA will submit their initial assessments on the tick size pilot’s impact 18 months after the pilot begins based on data generated during the first 12 months of its operation.
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