05.07.2015
By Terry Flanagan

SEC Approves Tick-Size Pilot

The Securities and Exchange Commission has approved a proposal by the national securities exchanges and Finra for a two-year pilot program that would widen the minimum quoting and trading increments–or 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 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,” said SEC chair Mary Jo White.

The SEC modified several provisions of the proposal submitted by the exchanges and Finra that take into account input from commenters. For example, the SEC extended the pilot 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 SEC also modified the market capitalization threshold for securities included in the tick size pilot and revised certain data elements concerning market maker profitability to make the collection less burdensome and assure the protection of confidential business information.

The tick size pilot will begin by May 6, 2016. It 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 $2.00 for every trading day.

The pilot will consist of a control group of approximately 1400 securities and three test groups with 400 securities in each selected by a stratified sampling.

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.

“Someone at the SEC has a wicked sense of humor,” said Adam Sussman, head of market structure and liquidity partnerships at Liquidnet. “What other kind of person would approve the tick pilot on the 5th anniversary of the Flash Crash with an implementation date on the next anniversary? In announcing the approval of the Tick Pilot with a number of substantial changes, the SEC is trying to strike a balance between the overall goals of the program with the numerous comments it received from the industry, including Liquidnet.”

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