ITG Offers Tick-Size Recommendations

Terry Flanagan

A proposed pilot program to deepen liquidity in some small-capitalization stocks by widening minimum quoting and trading increments needs to be recast, according to Jamie Selway, head of electronic brokerage at ITG.

“We view it as a foregone conclusion that the (U.S. Securities and Exchange Commission) is going to take a look at this policy question,” Selway told Markets Media. “The last thing we’d want is to do some sort of policy experiment that would make the markets worse. If we do an experiment to find out if changing tick size improves liquidity, let’s do that in a noninvasive way.”

In June, the SEC ordered Financial Industry Regulatory Authority (Finra) and stock exchanges to develop and file a proposal for a tick-size pilot program.

The proposed program will include stocks with a market cap of $5 billion or less, average daily trading volume of one million shares or less, and a share price north of $2. The pilot will consist of one control group and three test groups, each with 400 securities.

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. Pilot securities in the first test group will be quoted in $0.05 minimum increments, with trading at any price increment permitted today. Pilot securities in the second and third test groups will be quoted and traded in $0.05 minimum increments; securities in the third test group would be subject to a ‘trade-at’ rule preventing price matching by another venue that doesn’t display the best bid or offer.

In a Jan. 5 comment letter, ITG recommended that the trade-at provision be eliminated, that the pilot be implemented as an SEC rule rather than an SRO rule, and that brokers be permitted to modify limit prices for their clients when it is necessary to make their orders compliant with the $0.05 quoting increments.

The trade-at provision would fall particularly hard on internalizing broker-dealers, market makers that execute order flow from other broker-dealers off-exchange, and dark pools.

“We say make this about tick size only, don’t make it about trade-at,” Selway said. “Trade-at is something unrelated, so remove that part of it.”

Implementing the pilot through an SEC rule would eliminate conflicts of interest, as the existing NMS Plan approach is fashioned by national securities exchanges which are both SROs and for-profit entities which may compete with ATSs, according to ITG.

“With an SEC rule, you get economic cost benefit analysis and you get unconflicted public policy led by the regulator, not by a group of exchanges,” Selway said. “We think it’s cleaner to do this as an SEC rule.”

ITG also recommends that the pilot not require brokers to reject orders not denominated in nickel increments, and instead give them the discretion to modify orders to make them compliant with the pilot.

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