The Securities and Exchange Commission on Thursday gave final approval for a two-year pilot program beginning May 6, 2016, to increase the tick sizes — minimum quoting and trading increments — for smaller-cap stocks.
The program will include stocks of companies with $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 $2 for every trading day.
Data will be released publicly on an aggregated basis. Exchanges and the Financial Industry Regulatory Authority will submit their initial assessments on the tick size pilot’s impact 18 months after it begins.
“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 in a statement.
The program was proposed by national securities exchanges including the New York Stock Exchange and Nasdaq, and the Financial Industry Regulatory Authority. After taking public comments, SEC officials made several changes, including extending it to two years from one; reducing the size of block transactions eligible to participate for the exception; and removing the venue limitation that would have required price-matching executions to occur where a quotation was displayed. Other measures were to make data collection less burdensome and protect confidential business information.
A control group of approximately 1,400 securities and three test groups of 400 securities each will be selected by a stratified sampling. For the control group, trading would continue to occur at any price increment now permitted. In the first test group, trading would be quoted in 5-cent increments but permitted to trade at current price increments. The second test group will be quoted and traded at 5-cent increments, with certain exceptions; the third group would be similar to the second group but with a “trade-at” requirement to prevent price-matching by a trading center not displaying the best bid or offer.