SEC Issues Order Directing FINRA and Exchanges to Develop Tick Size Pilot Program

The SEC issued an order directing FINRA, BATS Exchange, BATS Y-Exchange, the Chicago Stock Exchange, EDGA Exchange, EDGX Exchange, the Nasdaq Stock Market Inc., Nasdaq OMX BX, Nasdaq OMX Phlx, the National Stock Exchange, the New York Stock Exchange, NYSE Arca, and NYSE MKT (collectively referred to as the “Exchanges”) to jointly develop and file a national market system plan to implement a pilot program (“Pilot Program”). 

The Pilot Program would, among other things, widen the quoting and trading increments for certain small cap stocks, with one test group incorporating a “trade-at” requirement.  The SEC intends the pilot program to provide a means of gathering information about the impact of decimalization on the liquidity and trading of the securities of small cap companies, and to test whether a wider tick benefits smaller companies.

If approved, the Pilot Program would be applied uniformly across U.S. markets and the exchanges for a one-year trial period. 

Lofchie Comment:  This pilot program is billed as a test of tick size. An interesting result of the study will be the portion that focuses on the “trade at” test; i.e., that a “trading center” generally cannot execute a trade except at a better price than that which is displayed on a public exchange. According to the release, this requirement is intended to prevent order flow from going to dark pools. However, the real effect of the test may be felt by market makers that internalize retail order flow. In this regard, note that the term “trading center,” includes not only exchanges and dark pools, but also “any . . . broker or dealer that executes orders internally by trading as principal or crossing orders as agent.”

Leaving aside the question of what variables are being tested here, it is good that the SEC is running pilot programs with a view to examining Reg. NMS. In this vein, the SEC might want to consider scoping out a full set of pilot programs around different aspects of Reg. NMS. 

See: SEC Order; Annex A and Annex B.