Exchanges and FINRA Submit Tick Size Pilot Plan as Required by SEC | Practical Law

Exchanges and FINRA Submit Tick Size Pilot Plan as Required by SEC | Practical Law

As required by the SEC, various securities exchanges and FINRA jointly submitted 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.

Exchanges and FINRA Submit Tick Size Pilot Plan as Required by SEC

Practical Law Legal Update 8-579-3925 (Approx. 3 pages)

Exchanges and FINRA Submit Tick Size Pilot Plan as Required by SEC

by Practical Law Corporate & Securities
Published on 27 Aug 2014 • USA (National/Federal)
As required by the SEC, various securities exchanges and FINRA jointly submitted 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 August 26, 2014, the SEC announced that various securities exchanges and FINRA had jointly submitted a proposal for 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. The SEC issued an order in June 2014 requiring the exchanges and FINRA to develop the proposal (see Legal Update, SEC Orders Exchanges and FINRA to Submit Tick Size Pilot Plan). The proposal is subject to a 21-day public comment period, after which it will be considered for approval by the SEC.
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 Congress).
The 12-month pilot is intended to allow the SEC, market participants and the public to study the impact of tick-size conventions on the liquidity and trading of smaller companies. It would include common stocks that satisfy all three of these criteria:
  • A market capitalization of $5 billion or less.
  • An average daily trading volume of one million shares or less.
  • A share price of at least $2 per share.
The pilot would consist of one control group and three test groups with 400 securities in each test group selected by stratified sampling. The four groups would use the following tick size increments:
  • Pilot securities in the control group would be quoted at the current tick size increment, $0.01 per share, and would trade at the increments currently permitted.
  • Pilot securities in the first test group would be quoted in $0.05 minimum increments, but could continue to trade at any price increment currently permitted.
  • Pilot securities in the second test group would be quoted in $0.05 minimum increments and, with certain exceptions, traded in $0.05 increments.
  • Pilot securities in the third test group would be subject to the same minimum quoting and trading increments as the second test group, but would 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.
During the pilot, the exchanges and FINRA would collect data and make it available to both the SEC and the public. No later than six months after the end of the pilot, the exchanges and FINRA would submit to the SEC a joint assessment of the impact of the pilot.
Update: On November 3, 2014, published a notice to solicit comments on the proposed tick size plan and pilot.