SEC Orders Exchanges and FINRA to Submit Tick Size Pilot Plan | Practical Law

SEC Orders Exchanges and FINRA to Submit Tick Size Pilot Plan | Practical Law

The SEC ordered various securities exchanges and FINRA to jointly develop a national market system pilot plan that, among other things, would widen the quoting and trading increments, or tick sizes, for certain small capitalization stocks.

SEC Orders Exchanges and FINRA to Submit Tick Size Pilot Plan

Practical Law Legal Update 6-572-5206 (Approx. 3 pages)

SEC Orders Exchanges and FINRA to Submit Tick Size Pilot Plan

by Practical Law Corporate & Securities
Published on 25 Jun 2014 • USA (National/Federal)
The SEC ordered various securities exchanges and FINRA to jointly develop a national market system pilot plan that, among other things, would widen the quoting and trading increments, or tick sizes, for certain small capitalization stocks.
On June 24, 2014, the SEC issued an order directing various securities exchanges and FINRA to jointly develop a national market system pilot plan that, among other things, would widen the quoting and trading increments, or tick sizes, for certain small capitalization stocks. Since the early 2000s, the US securities markets have traded and quoted public equity securities in the US in one cent increments, a practice known as decimalization. Decimalization has come under scrutiny in recent years as possibly detrimental to small and middle-sized companies, leading to a provision of the JOBS Act requiring the SEC to submit a staff study to Congress on decimalization (see Legal Update, SEC Releases Report on Decimalization as Required by JOBS Act).
The SEC order sets out certain requirements for the pilot plan, including:
  • The length of the pilot program must be one year.
  • The securities included in the pilot program must be common stocks with:
    • a market capitalization of $5 billion or less;
    • an average daily trading volume of one million shares or less; and
    • a share price of $2 per share or more.
  • The pilot program must consist of one control group and three test groups, with 300 pilot securities in each test group. The pilot securities should be a stratified sampling by market capitalization and price.
  • The four groups must use the following tick size increments:
    • pilot securities in the control group will be quoted at the current tick size increment, $0.01 per share, and will trade at the increments currently permitted;
    • pilot securities in the first test group will be quoted in $0.05 minimum increments, while trading may continue at any price increment currently permitted;
    • pilot securities in the second test group will be quoted in $0.05 minimum increments and, with certain exceptions, traded in $0.05 increments; and
    • pilot securities in the third test group will be subject to the same minimum quoting and trading increments as the second test group, but will also be subject to an additional "trade-at" requirement.
The exchanges and FINRA must file their pilot plan with the SEC by August 25, 2014. Once filed, the SEC will publish the plan for public comment.