‘Tick Size’ Pilot Needs Streamlining, STA Says

Terry Flanagan

A proposed pilot program to deepen liquidity in some small-capitalization stocks by widening minimum quoting and trading increments has conceptual merit, but it needs streamlining, according to the Security Traders Association.

“The STA views the proposed plan as too complex in its current design,” the group said in a Sept. 23 comment letter to the U.S. Securities and Exchange Commission, which in June had ordered Financial Industry Regulatory Authority and stock exchanges to develop and file a proposal for a tick-size pilot program.

The proposed program, outlined by the SEC in an Aug. 26 release, 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.

It’s some details of the Finra and exchange proposal that have drawn fire from the New York-based STA.

The STA “is opposed to trade-at…It remains our view that execution choices for an investor’s orders would be limited in a ‘trade-at’ regime,” the STA said in its comment letter, which was signed by chairman John Daley and president and chief executive James Toes. “We believe that Test Group Three, the ‘trade-at’ group, as currently designed with depth of book price protection is too complex and we recommend it be simplified.

Minimum pricing variations (MPVs) greater than one penny may strengthen secondary trading in some smaller companies and better position such firms to raise capital, the STA noted. The primary goal of a tick-size pilot should be to collect data that measures overall liquidity, both natural and enhanced, available to investors in small-cap stocks.

Overall, the STA “supports a pilot plan to study the effects decimalization with no minimum price variation has on the liquidity of smaller capitalization stocks.”

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