11.18.2015
By Terry Flanagan

Tick Pilot: Delay Helps, But Questions Remain

More breathing room is nice. More clarity would be better.

That’s the view of some market participants regarding the delay in the regulatory pilot program to have certain small-capitalization stocks trade at wider ‘tick’ sizes.

“We’re still full steam ahead addressing the rules requiring the collection and reporting of data from member firms, and making sure our systems are in compliance with the quoting and trading requirements,” said Jay Biancamano, head of equities product marketing for the Americas at Fidessa. “There’s still a very steep education curve out to our users which we are going to address, but because the (Self-Regulatory Organizations) haven’t put the final rules in place it’s difficult for us to address it.”

On November 6, the U.S. Securities and Exchange Commission pushed back implementation of the tick size pilot by five months to October 2016. Greenlighted by the SEC this past May, the plan is meant to gauge whether widening the increments at which small-cap stocks are priced to as much as a nickel would boost liquidity, and by extension capital formation and jobs growth.

For the brokers and technology providers that connect traders to market centers, the tick size pilot is expected to be a significant project, as systems will need to be up to code for a control group and three test groups, each with its own specific protocol. At a recent industry conference, there was talk that the programming just to address the third test group — which includes a ‘trade-at’ provision — will be more substantial than some previous rulesets aimed at much-wider swaths of the market.

The postponement in the go-live date “applies to the operators of the exchanges and the SROs, the ones who are going to implement the tick pilot,” Biancamano said. “It hasn’t exempted other people from doing work around the tick pilot. The pilot is much more complex than first thought and it’s created more challenges than previously thought.”

Jay Biancamano, Fidessa

Jay Biancamano, Fidessa

For most securities firms that buy and sell small-cap stocks, the technology recalibration will be left to third-party tech vendors to handle behind the scenes. Traders’ mission will be to adjust their  trading to wider tick sizes in the approximately 400 securities per bucket.

“First, obviously you’ll have to know that you’re trading in tick size pilot stocks, so hopefully it will be well-identified,” said Joe Saluzzi, co-founder and co-head of equity trading at Themis Trading. “I think you’ll probably want to be more patient in those names.”

“I’m looking for less of the ‘wiggle’ where people start to move on you as soon as you place a new bid or offer, because moving is going to cost them a nickel. A nickel move is a lot bigger for someone to try to play around with than a penny,” Saluzzi said. “I’m expecting to see a lot less movement, and hopefully a lot more depth in the tick size pilot names.”

In Saluzzi’s view, the tick size pilot doesn’t have much energy behind it currently, and it’s possible that implementation will be delayed again, but ultimately it will happen. He’s most interested in the test group with the trade-at rule, which requires trades to execute on exchanges unless alternative venues provide a better price.  

“If you don’t put in the trade-at component, you’re letting people jump in between the spread when the whole point is trying to bucket liquidity at certain price points, trying to add some depth to the stocks that don’t trade as often,” Saluzzi said. “If you allow them to just trade in between on any other dark pool, you’re kind of defeating the purpose.”

Biancamano said still-to-be-answered logistical questions about the tick size pilot include who will collect the data, what specifically regulators will look for, and what will be the metrics to determine success or failure. There is also uncertainty regarding whether the planned two-year duration of the tick size pilot is long enough to assess its impact on the market for initial public offerings, which has been specified as a key target area.

The effect on liquidity providers will also be under the microscope, though again the goal line isn’t clearly marked. “Is it going to result in higher market-maker profitability?” Biancamano asked. “It depends on how you evaluate that. What is market-maker profitability? What are the numbers that go around that? Is it a gross or net number? Is it based on the number of markets you make, whether or not nickels have allowed you to take a bigger piece of the spread?”

“People in the industry have accepted this is going to happen, and they’re waiting for it to happen, but they don’t know what in particular they need to do differently,” he said. “If you don’t know what the final rules are, you don’t know what you have to change, or correct.”

Added Biancamano, “I think we’re going to have uncertainty up until the day we go live, and then even more will develop as the pilot moves ahead.”

Featured image by Destina/Dollar Photo Club

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