U.S. Senators Pat Toomey (R-PA) and Mark Warner (D-VA) (the “Senators”) sent a letter to SEC Chair Mary Jo White in which they urged the SEC to lengthen the time period of the Tick Size Pilot Program (the “Pilot”).
The Pilot would change the minimum price increments at which certain small capitalization stocks are traded on U.S. exchanges in an attempt to encourage research on and investment in these stocks, as well as ensure adequate liquidity in secondary trading.
The Senators applauded the SEC for its “proactive work” on the Pilot, stating that it “has the potential to create new opportunities for small businesses to grow and succeed.” However, they added, the one-year duration specified in the current proposal may be too short to attract the attention needed from market participants to gauge the effectiveness of the Pilot.
The Senators explained that changing various systems and the infrastructure to make markets trade at wide spreads “requires both time and financial investments, which are less likely to make sense for market participants if the Pilot runs for too short a duration.” According to the Senators, even if participation in the Pilot were high, the data collected from the one-year program would be at “significant risk” of being distorted by short-term market fluctuations. For those reasons, the Senators urged the SEC to lengthen the time period of the Pilot to ensure that adequate data would be collected.
Lofchie Comment: It is good to see bipartisan support for a rule change that is intended to help business. A better approach might be for the SEC to run pilot programs under a comprehensive plan for testing a number of different trading rules.
As for helping small businesses, certain measures might provide more direct benefits than an increase in tick size (where the benefit is fairly indirect). The SEC should develop new rules that might encourage the production of research on small companies, since investors would be more likely to trust such companies if there were more information and opinions about them from third parties. The research rules that were developed in response to overly enthusiastic reports by investment banks on internet companies likely had the negative consequence of reducing the incentive for investment banks to write research about companies that are not the subject of wide investor interest.
See: The Senators’ Letter.