Stock Prices: Take a Penny, Leave a Penny, Help a Small-Cap

Higher tick sizes would make investors pay more, but might entice small companies to go public.
Photograph by Nicolas Vallejos

It sounds like backward progress: Instead of pricing stocks fluidly, in one-penny increments, gap them out by nickels, dimes, or more, so that brokers make more money on trades. A proposal to do just that is slowly getting more popular.
The Securities and Exchange Commission appears likely to approve a pilot program testing higher “tick sizes” on some stocks, Bloomberg News reported today. The theory is that this could make thinly traded small and midsize companies more attractive, increasing trading volume and the likelihood that analysts publish research on stocks that otherwise wouldn’t be worth their time. The 2012 Jumpstart Our Business Startups, or JOBS, Act required the SEC to explore the issue.

“There seems to be a lot of support for a pilot program, and we think that makes sense,” John Ramsay, the SEC’s acting director of trading and markets, told Bloomberg. “We’re still working through the details of how it should be structured.”

Stocks traded in fractions until the turn of the millennium, when penny increments were introduced, a switch that was also known as “decimalization.” The shift to narrower spreads was meant to benefit Main Street investors, by reducing the profit brokers make on each transaction. That’s come true. But critics have since argued that 1¢ pricing has had the unintended side effect of discouraging smaller companies from going public, for fear that they will be ignored by market makers and lightly traded once they are listed. Initial public offerings raised just $112 billion in 2012, the lowest level since the financial crisis.

“If you can actually set your tick increment much wider, then the marketplace will react,” Jeffrey M. Solomon, the chief executive officer of broker Cowen & Co., told Bloomberg in June. “If you can set it wide enough and there’s profit incentive for middlemen to come in and make markets, then those middlemen will have an economic incentive to write research.”

If larger ticks make a comeback, one issue is who would set those intervals—the exchanges or companies themselves. Retail investors would pay more, but proponents say the possible benefit to the larger economy would be worth it.

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