U.S. securities regulators are calling on various U.S. stock exchanges to test the possibility of adopting wider trading increments for small-capitalization stocks.
The call has come through in the form of an order from the U.S. Securities and Exchange Commission (SEC) requiring certain exchanges and the Financial Industry Regulatory Authority Inc. (FINRA) to jointly develop a pilot program that would, among other things, test wider quoting and trading increments for certain small-cap stocks.
The SEC’s order requires FINRA and the exchanges to file a plan by Aug. 25. The plan would then be issued for public comment before regulators decide whether to go ahead with it.
If adopted, the pilot program would be designed to test larger trading increments for small-cap stocks to address concerns that decimalization and the move to penny quoting may have had a detrimental impact on the trading and liquidity of small caps. The SEC order says that a pilot program will allow it to further study the impact of decimalization and to consider whether this exercise is a viable way to gather data on the benefits of larger tick sizes.
The SEC’s order outlines the basic parameters for the test. Among other things, it suggests that the test should run for a year in order to generate sufficient data. It also recommends using the stocks of companies with a market cap of less than US$5 billion, average daily trading volume of one million shares or less and a share price of at least $2 a share.
In addition, the SEC says that the pilot should consist of one control group and three test groups with 300 securities in each test group. It envisions that the control group stocks would continue to trade at 1¢ increments; one test group would quote at 5¢ increments, but trade at current tick sizes; a second group would both quote and trade at 5¢ increments; and the third group would trade and quote at 5¢ increments, but with an additional requirement that trades must be executed at the national best bid or offer (NBBO).
The stock exchanges subject to the order include various markets that BATS Global Markets Inc., Nasdaq Stock Market and the New York Stock Exchange operate.