The SEC's proposed tick-size pilot program targeting small-cap stocks should lead to improved access to capital for small companies, sources say, but whether that translates to higher returns for institutional small-cap investors is less clear.
The proposed one-year program, announced by the Securities and Exchange Commission and created by the Financial Industry Regulatory Authority and national securities exchanges like the New York Stock Exchange, awaits a decision by the full commission before implementing.
It would divide stocks of firms with market capitalizations of up to $5 billion into a control group that would trade small-cap shares at any price increment currently permitted and three test groups using 5-cent trading increments: one exclusively trading at 5 cents; one allowing some shares under certain order agreements to trade at any price increment currently permitted; and the third subject to a “trade-at” requirement that prevents price matching by a trading center that is not displaying the best bid or offer. No date has been set for an SEC vote on the proposal.
“For large investors dealing in blocks, in theory there'll be more liquidity in the market with a wider spread,” said Brian Schwieger, head of equities, London Stock Exchange Group, London. “That would absolutely benefit the manager and asset owner. That's the theory.”
“If you're widening the tick spread, you're trying to find the right balance between the cost of investing and making sure the liquidity providers are incentivized where needed,” Mr. Schwieger said. “When spreads widen, there's typically larger trade sizes and larger volume per trade, but at the same time, there could be a reduction in the number of trades. It's easier to find blocks, which is great news for the larger investor. Wider spreads mean more stable prices.”
The pilot program's focus on increased liquidity will benefit small-cap investors because “they'll be more confident that you can get out of there when you want and at the right price,” said Kevin McPartland, principal and head of market structure research at Greenwich Associates, Darien, Conn. “There's not a lot of liquidity in small-cap trading. Why that is, is uncertain. Is it because there aren't enough market makers to get good pricing? Or is it that there's not enough demand for small-cap issues? Is it hard to get in and out of small caps at the right price? ... If asset owners are looking at a stock and this test shows improved liquidity, then it will make more of an impact in a good way on small-cap investing.”
But David Klaskin, founder, CEO and chief investment officer of small-cap equity manager Oak Ridge Investments LLC, Chicago, sees a tick-size increase as having no positive impact on his firm's investment returns. “Pennies are good,” Mr. Klaskin said. “It's a good thing to have tighter spreads. I need to access size. I think this could hinder what I do. Five-cent-wide margins aren't going to help.” Oak Ridge had $4.4 billion in assets under management as of June 30, the majority in small-cap growth.