Starting next spring, U.S. markets will experiment with a plan to enhance trading in smaller companies by widening their trading spreads.
The U.S. Securities and Exchange Commission (SEC) has approved a joint proposal from the country’s national securities exchanges and the Financial Industry Regulatory Authority (FINRA) for a two-year pilot program that would test the effects of widening the minimum quoting and trading increments for the stocks of smaller companies. The SEC says that it plans to use the pilot program to assess whether using wider tick sizes enhances market quality for these sorts of stocks.
The so-called tick size pilot will begin by May 6, 2016. It will consist of three test groups containing 400 stocks each. One group with be quoted in 5¢ increments, but will continue to trade at any allowable increment; the second group will both quote and trade at 5¢ increments (subject to certain exceptions); and the third group will also quote and trade at 5¢ increments, but will also be subject to an additional “trade at” requirement. There will also be a control group of 1,400 stocks that will continue to trade under current rules.
The pilot will include the stocks of companies with US$3 billion or less in market capitalization, an average daily trading volume of 1 million shares or less, and a volume weighted average price of at least US$2.00 for every trading day.
The data generated during the experiment will be released publicly on an aggregated basis to allow analysis of its impact. And, the exchanges and FINRA will submit their initial assessments on the impact 18 months after the pilot begins, based on data generated during the first 12 months.
“The data generated by this important market structure initiative will deepen our understanding of the impact of tick sizes on market quality and help us consider new policy initiatives that can improve trading in the securities of smaller-cap issuers,” said SEC Chairwoman Mary Jo White.
The project comes as regulators and trading venues on both sides of the border tinker with market structure in an effort to improve market quality and bolster investor confidence amid the dramatic changes that have taken place in the trading environment in recent years.