SEC Panel Opposes Test of Wider Share-Price Increments

A U.S. Securities and Exchange Commission advisory panel said the regulator should drop plans to test incentives for trading in small-company stocks.

The SEC’s Investor Advisory Committee voted 13-3 to urge the agency not to conduct a pilot program to widen the minimum price, or tick, at which small stock prices are quoted on exchanges. The program, which has supporters in Congress, would reward brokers for making markets in less liquid stocks by widening the spread they earn when buying and selling shares.

“The vast majority of people in these small-cap companies are individuals,” said J. Robert Brown Jr., a committee member and University of Denver law professor. “So what this tick-size experiment is, is a tax on individuals.”

The advisory committee’s opinion is unlikely to stop plans for a tick-size pilot but could affect its design by regulators. SEC Chairman Mary Jo White said in October that the commission was moving forward with plans to develop the trial program, which would be required under legislation that passed the House Financial Services Committee in November.

Supporters of wider tick sizes say it may promote trading in less liquid stocks and could encourage more fledging companies to go public. Some backers say trading in small stocks was hurt by a 2001 requirement that all shares be priced in pennies, which decreased profits for equity dealers who funded analyst research with the revenue earned on wider bid-ask spreads.

Monitor Results

Wider tick sizes probably won’t foster all the benefits that proponents claim, SEC Commissioner Michael Piwowar said at today’s meeting. Yet the SEC still should undertake the program because regulators can monitor spreads and other indicators of market quality and halt the trial if it hurts retail investors, he said.

“Maybe increasing the tick size for small-cap companies results in tangible benefits for investors and issuers,” Piwowar said. “I doubt it. But there is still little downside risk to a pilot program.”

The investor committee was unusually divided over the program, with three members arguing the benefits may outweigh any increased costs imposed on investors.

“Increased liquidity is a good thing for individual investors and for the overall market,” said Mellody Hobson, a committee member who is chairman and president of Ariel Investments LLC. “Illiquidity comes at a cost that is more than just pennies per share.”

Several committee members said the recommendation was important to pass now because regulators and lawmakers have not sufficiently considered the impact of the changes on investors.

“The lack of focus on investors from the proponents of higher spreads is noticeable and gravely concerning,” said Darcy Bradbury, a member of the committee and a managing director at D.E. Shaw & Co. LP. “We do not believe the commission has to basically price fix to solve this problem.”

To contact the reporter on this story: Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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