SEC Launches Tick Size Pilot Program

The SEC notified investors that a Tick Size Pilot Program went into effect on October 3, 2016. The program effectively widened the minimum quoting and trading increment (i.e., “tick size”) for certain small capitalization stocks. According to the SEC, the Tick Size Pilot Program is intended to study the effect of tick size on the liquidity and trading of small capitalization stocks.

The pilot program includes the stocks of companies with (i) $3 billion or less in market capitalization, (ii) an average daily trading volume of one million shares or less, and (iii) a volume-weighted average price of at least $2.00 for every trading day. The pilot program involves a control group of approximately 1,400 securities and three test groups with 400 securities in each, all of which were selected by a stratified sampling:

  • pilot securities in the control group are quoted at the current tick size increment of $0.01 per share and trade at the currently permitted increments;
  • pilot securities in the first test group are quoted in $0.05 minimum increments but continue to trade at any price increment that currently is permitted;
  • pilot securities in the second test group are quoted in $0.05 minimum increments and trade at $0.05 minimum increments, subject to a midpoint exception, a retail investor exception, and a negotiated trade exception; and
  • pilot securities in the third test group are subject to the same terms as the second test group and also are subject to the “trade-at” requirement to prevent price matching by a person who is not displaying orders at the price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies.

The SEC reminded investors that the Tick Size Pilot Program, which commenced on October 3, 2016, will run for a two-year period.

Lofchie Comment: On the one hand, it is good that the SEC is conducting experiments to determine how the market system functions and whether liquidity for small issuers can be improved. On the other, it is unclear why SEC is focusing on this particular experiment. This kind of program seems unlikely to produce meaningful results. Even if the results should prove meaningful, more useful experiments could have been conducted. For some reason, this broad tick test caught Congress members’ fancy (in the JOBS Act) when they ought to have focused their attention on compelling the SEC to request public comment on which tests to try before pursuing a given course.