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SEC Approves Tick Size Pilot Program
Practical Law Legal Update 6-612-0588 (Approx. 3 pages)
SEC Approves Tick Size Pilot Program
by Practical Law Corporate & Securities
| Published on 07 May 2015 • USA (National/Federal) |
The SEC approved a national market system pilot program that, among other things, will widen the quoting and trading increments, or tick sizes, for certain small capitalization stocks.
On May 6, 2015, the SEC approved a proposal by the national securities exchanges and FINRA for a two-year pilot program that, among other things, will widen the quoting and trading increments, or tick sizes, for certain small capitalization stocks. The SEC plans to use the pilot program to evaluate whether wider tick sizes enhance the market quality of small capitalization stocks for the benefit of issuers and investors. The tick size pilot will begin on May 6, 2016.
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. The SEC released that study on July 20, 2012 (see Legal Update, SEC Releases Report on Decimalization as Required by JOBS Act).
The pilot will include stocks that satisfy all three of these criteria:
- A market capitalization of $3 billion or less.
- An average daily trading volume of one million shares or less.
- A volume weighted average price of at least $2 for every trading day.
The pilot will consist of one control group of approximately 1,400 securities and three test groups with 400 securities in each test group selected by stratified sampling. The four groups will 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, but will continue to trade at any price increment currently permitted.
- Pilot securities in the second test group will be quoted in $0.05 minimum increments and will trade in $0.05 minimum increments subject to a midpoint exception, a retail investor exception and a negotiated trade exception.
- 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. In general, a "trade-at" requirement prevents price matching by a trading center that is not displaying the best bid or offer. In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions that mirror those under Rule 611 of Regulation NMS will also apply.
During the pilot, the exchanges and FINRA will collect data and make it available to the public on an aggregated basis. Eighteen months after the pilot begins, the exchanges and FINRA will submit their initial assessments on the tick size pilot's impact based on data generated during the first 12 months of its operation.