Anxious for the Securities and Exchange Commission to begin a 12-month experiment in altering “tick size” requirements? Well, be prepared to wait a bit longer. The Commission has extended its deadline to act upon the proposal from March 7 to May 6.
The national securities exchanges and the Financial Industry Regulatory Authority plan to experiment with tick size alternatives, allowing some stocks to trade in five-cent increments, and see whether that trading structure increases their liquidity and should be made permanent.
The proposal, announced by the Securities and Exchange Commission in August, would create a 12-month pilot program for widening minimum quoting and trading increments for a sampling of companies with market cap of $5 billion or less. The SEC plans to use the results of the pilot program to assess whether the changes benefit of investors and issuers.
The SEC ended the practice of trading stocks in fractional dollar values (down to one-sixteenth of a dollar) in the 2000s, in favor of trading in one-cent increments. Critics of that move say it actually reduced the liquidity of certain types of stocks—particularly small-capitalization companies—because it squeezed out the profit for traders to the point where they no longer bothered. In June, SEC commissioners ordered the exchanges and FINRA to develop a tick size pilot program. Now that the plan is filed, it will undergo a 21-day public comment period that precedes Commission approval.
The pilot program is likely to include stocks with a market capitalization of $5 billion or less; an average daily trading volume of one million shares or less; and a closing share price of at least $2 per share. It will consist of one control group and three test groups with 400 securities in each group. Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share, and trade at the increments currently permitted.
Securities in the first test group will be quoted in $0.05 minimum increments and trading would continue to occur at any price increment that is permitted today. Securities in the second test group will be quoted in $0.05 minimum increments, and traded in $0.05 minimum increments subject to certain exceptions. Securities in the third test group will be subject to the same minimum quoting and trading increments (and the same exceptions) as the second test group, but in addition would be subject to a “trade-at” requirement that prevents price matching by a trading center that is not displaying the best bid or offer.
The new tick plan is partly driven by the JOBS Act, which directed the SEC to conduct a study on the effect of decimalization in stock prices, and with an eye on the question of whether one-cent increments dried up liquidity for smaller companies and curbed enthusiasm for initial public offerings.
While the SEC is pushing up the deadline in order to better consider details of the proposal, a push is underway for it to consider a longer trial program. In a January, Sens. Pat Toomey (R-Pa.), and Mark Warner (D-Va.) wrote to SEC Chairman Mary Jo White to extend the program. “While we applaud the Commission’s efforts to design the pilot, we are concerned that the one-year duration now in the proposal may be too short to attract the attention from market participants needed to appropriately gauge the effectiveness of the pilot,” they wrote. Various systemic and infrastructure to make markets trade at wider spreads requires both time financial investments, which are less likely to make sense for market participants if the pilot runs for too short a duration.”