Exchanges Said to Prepare Pilot Programs for Changing Tick SizesSam Mamudi and Dave Michaels
Proposals to study changing the price increments at which some U.S. stocks change hands may be getting closer to implementation.
Executives from the biggest American exchanges are drafting a pilot program that would widen so-called tick sizes on about 100 smaller and less-liquid securities for a year, according to a document seen by Bloomberg News. Another would cover lower-priced, active stocks to see if smaller increments would benefit investors, the document showed.
Most American shares have been bought and sold at prices denominated in pennies for more than a decade after the spread was narrowed in an initiative known as decimalization, which some economists say hurt liquidity by lowering profits for market makers. Those professionals, who help facilitate orderly trading, earn money by collecting the difference between the highest price to buy a share and the lowest to sell.
“The exchanges have been asked to construct pilots,” said David Weild, head of capital markets for Grant Thornton LLP and former vice chairman of the Nasdaq Stock Market. “The SEC is obviously moving ahead, or they would not be putting people through the process.”
Officials from the New York Stock Exchange and Nasdaq held discussions with the Securities and Exchange Commission in the past week on the pilots, according to a person with direct knowledge of the matter who asked not to be identified because the talks were private.
The SEC has asked exchange officials to help draw up the plans because they know the most about how securities trade, according to two people with direct knowledge of the discussions. Under SEC rules, exchanges have the authority to jointly propose marketwide plans that affect share transactions. The commission hasn’t set a deadline for reporting back, the people said.
U.S. markets moved to pricing in pennies from sixteenths of a dollar in 2001 as part of a law intended to reduce costs for investors. President Barack Obama’s Jumpstart Our Business Startups Act of 2012 authorized the SEC to look at the impact of decimalization and set a minimum trading increment of as much as 10 cents for emerging-growth companies, or those with revenue of less than $1 billion a year.
Market makers and dealers need more economic incentives to bring smaller companies public, provide bids and offers and publish stock research, according to Weild. As many as 350 initial public offerings a year raised less than $25 million from 1991 to 1997, according to data compiled by Grant Thornton. Fewer than 50 did so annually on average starting in 2000, the data show.
The SEC in February hosted an event to discuss the possibility of a pilot program. Its staff favors a pilot program based on the support market participants showed for the idea at a February roundtable, SEC Acting Trading and Markets Director John Ramsay said in March.
Sara Rich, an NYSE Euronext spokeswoman, and Robert Madden, a Nasdaq spokesman, declined to comment on the pilot programs. Randy Williams, a BATS Global Markets Inc. spokesman, also declined to comment. SEC spokesman John Nester declined to comment.
A separate proposal would govern lower-priced equities that see the highest trading volume. Proponents of the measure say increments can be smaller for these stocks because there is no need to incentivize traders to provide a market.
That pilot would last six months and feature 100 securities, though participation by traders would be optional. As with the small-cap study, the exchanges would report to the SEC each month on whether spreads on illiquid stocks narrow and if more shares are displayed for purchase or sale at competitive prices. Such a plan would be subject to public comment and the approval of SEC commissioners, who haven’t signed off, according to the people.
The SEC has asked the exchanges to flesh out how long the pilot would last and how to link the minimum quoting increment to variables such as market capitalization or trading volume.
The SEC and exchanges are working on the pilot as some lawmakers in Congress say smaller public companies should be allowed to select their own tick size. A bill introduced last month by Representative David Schweikert, an Arizona Republican, would allow certain companies to choose increments of either 5 cents or 10 cents.
Companies would be eligible if fewer than 500,000 of their shares trade per day or if the value of shares available for purchase is under $500 million. Representative Sean Duffy, a Wisconsin Republican, said at a House hearing yesterday that he plans to introduce a bipartisan bill that would require the SEC to conduct a pilot program for wider tick sizes.
“I would be really surprised if something doesn’t happen before the end of the year,” Weild of Grant Thornton LLP said.