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Equity traders give poor review of SEC’s tick-size pilot in small caps, Greenwich finds

Traders on the floor of the New York Stock Exchange.

Most U.S. money manager equity traders interviewed by Greenwich Associates are either uncertain about or opposed to the SEC's tick-size pilot in small-cap stocks, with many saying the agency should concentrate on other issues like maker-taker rebates, speed bumps at exchanges and order routing.

About 40% of the 52 traders interviewed for the report, "Investors' Take on Market Structure Issues," said the tick-size pilot, launched by the Securities and Exchange Commission two years ago, failed in its goal to increase liquidity in small-cap equities. Just more than 50% are uncertain about the liquidity benefits.

Thirty percent of all traders said the pilot should be terminated immediately.

"It's time to clear the deck of the tick pilot in order to focus on other topics," said Richard Johnson, vice president of market structure and technology at Greenwich Associates and author of the report, said in a news release.

Instead, according to 62% of traders, the SEC should institute an access fee pilot to measure the impact of maker-taker rebates, where exchanges pay brokers in return for trading on their venues. Sixty-five percent said that such rebates distort the market because brokers could choose to trade based on the rebate instead of the venue with the best execution.

Concerning speed bumps at exchanges, where a delay measured in microseconds helps to avert high-frequency trading, they're backed by 85% of traders, though 29% of traders support only the 350-microsecond delay used by IEX Group and approved by the SEC.

"This is not even a close call," Mr. Johnson said. "If regulators have decided that speed bumps are a permissible part of market structure, then other exchanges should be free to implement their own versions, subject to regulatory approval."

A majority of traders were also opposed to the SEC's current order protection rule, which requires traders to route orders to the venue with the best price. Opponents argue that the rule has inadvertently led to a fragmented equity market, with 31% saying the rule should be modified to allow for block trading exemptions. Also, 17% thought the rule should be replaced with a "trade-at" rule that would require orders to avoid dark pools unless they could provide the best price, 10% said the entire rule should be abolished and 6% said the SEC should conduct a pilot study on the rule.

Traders were interviewed between June and September. The full report is available on Greenwich's website.