SEC Announces Pilot Plan to Assess Stock Market Tick Size Impact for Smaller Companies (with Lofchie Comment)

The SEC announced that the national securities exchanges ("exchanges") and FINRA filed a proposal to establish a national market system plan that would implement a 12-month pilot program.

The proposed program would widen minimum quoting and trading increments ("tick sizes") for certain stocks with smaller capitalization, and would include stocks with a market capitalization of $5 billion or less, an average daily trading volume of one million shares or less and a closing share price of at least $2 per share.

The pilot will consist of one control group and three test groups, with 400 securities in each test group selected by stratified sampling:

• 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. The control group would represent a baseline for analysis during the pilot period;
• pilot securities in the first test group will be quoted in $0.05 minimum increments. Trading would continue to occur at any price increment that is permitted today;
• pilot securities in the second test group will be quoted in $0.05 minimum increments, and traded in $0.05 minimum increments subject to certain exceptions; and
• pilot securities in the third test group will be subject to the same minimum quoting and trading increments (and the same exceptions) as the second test group, but in addition would be subject to a "trade-at" requirement. In general, a "trade-at" requirement prevents price matching by a trading center that is not displaying the best bid or offer.

The program requires that the exchanges and FINRA collect and transmit data to the SEC.

Lofchie Comment: The most significant part of this test seems to be not the expansion of trading increments (which has gotten the most attention and is the purported purpose of the rule), but rather the "trade-at" test. The outcome of that test could have very material implications for the manner in which the markets work, including by determining whether firms may profitably internalize orders. Unfortunately, the potential value of this test is undermined by its treatment as an incidental add-on to an experiment in increasing tick size. The "trade-at" test would be more meaningful if it were run independently of the tick test and at the ordinary one-penny tick increment. (While a tick study is mandated by Section 106 of the JOBS Act, it is too bad that this test seems to be the sole focus of the SEC at this time.) More generally, the SEC should be planning a long-term series of market experiments.

See: Announcement; Proposed Plan.