The SEC has approved a two-year pilot program to try wider trading increments, or tick sizes, for stocks of smaller companies to determine whether such a move will improve the market for those equities and benefit issuers and investors.
The pilot will start on 6 May, 2016 and continue for at least two years to examine whether tick sizes of 5 cents, rather than the current norm of 1 cent, will boost interest in the stocks by allowing traders to register higher gains per trade and reducing volatility.
A group of more than 1,000 stocks, all with market capitalizations of $3 bn or less, an average trading volume of a maximum of 1 mn shares per day and a volume-weighted average price of about $2 for every trading day, have qualified for the pilot.
‘The data generated by this important market structure initiative will deepen our understanding of the impact of tick sizes on market quality and help us consider new policy initiatives that can improve trading in the securities of smaller-cap issuers,’ SEC chairman Mary Jo White says in a press release announcing the pilot program.
The test will divide the stocks into four categories of several hundred stocks each. In the first category, the control group, stocks will continue to trade with 1 cent tick sizes under current trading rules. In the first test group, stocks will be quoted at 5 cent increments but will be allowed to trade at the current tick sizes. Stocks in the second test group will be both quoted and traded at 5 cent increments except for negotiated and retail trades. In the third test group, stocks will trade with the same conditions as the second, plus an exception for block-sized trades.
The test was initially proposed by national securities exchanges and the Financial Industry Regulatory Authority (FINRA). In approving the proposal, the SEC extended the trial period from one to two years, changed the market capitalization requirements and made other modifications.
