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Regulation

Pragma Securities: Small-cap tick size pilot will cost investors more than $350 million

The SEC's tick-size pilot for small-cap stocks will end up costing investors more than $350 million in reduced execution quality by the time it's scheduled to end next month, according to a report by Pragma Securities, a quantitative trading technology provider.

According to Pragma's report, "Tick Size Pilot — Evaluating the Effect of the Pilot Program on Execution Quality," investors trading stocks priced less than $40, which represent more than 70% of the test group, incurred costs in excess of $200 million during the 18 months ended June 30. In total, all stocks traded through the tick pilot incurred a total of $300 million in excess trading costs because of the increased implementation shortfall — the difference between the price when a decision to trade is made and when it is executed — and wider spread sizes mandated in some of the groups, the report said.

In the pilot, a control group of about 1,400 small-cap stocks trades at the current 1-cent increment and three test groups each trade 400 stocks: one with stocks quoted in 5-cent increments but allowed to trade at current price increments; one with stocks quoted and traded at 5-cent increments, with certain exceptions; and one with 5-cent quotes and a "trade-at" requirement to prevent price matching by a trading center not displaying the best bid or offer.

"While the SEC's tick-size pilot was launched with the intent of helping investors and issuers, the outcome has been very different," said David Mechner, CEO of Pragma Securities. "Concerns around execution quality and costs for investors were raised early on, and proved to be well-founded. Given our findings, we strongly recommend that the tick size pilot be unwound at the end of the pilot period."

The report is available on Pragma's website.