U.S. equity markets are going to try widening tick sizes for small cap stocks to see if that improves market quality.

The U.S. Securities and Exchange Commission (SEC) has announced plans for a pilot program that will explore whether widening the minimum quoting and trading increments (tick sizes) for certain small cap stocks enhances market quality, and benefits issuers and investors. The various national securities exchanges and the Financial Industry Regulatory Authority (FINRA) have filed a proposal with the SEC for a targeted 12-month pilot.

The SEC ordered the exchanges and FINRA to develop a proposal for a tick size pilot program back in June. That proposed plan will now go out for a 21-day comment period, and will be subject to commission approval after that.

The pilot program will include stocks with a market capitalization of US$5 billion or less; an average daily trading volume of one million shares or less; and a closing share price of at least US$2 per share. The pilot will consist of one control group and three test groups with 400 securities in each test group.

The control group will be quoted in 1¢ increments and allowed to trade as currently permitted; one test group will be quoted in 5¢ increments, but will trade at any price increment; a second group will be both quoted, and required to trade, in 5¢ increments; and the final test group will quote and trade in 5¢ increments, but would also be subject to a “trade-at” requirement that aims to prevent price matching by a trading center that is not displaying the best bid or offer.

The data produced by the pilot will be collected and sent to the commission for analysis, and it will also be made publicly available in an agreed-upon format. The exchanges and FINRA will also prepare an assessment of the impact of the pilot for the SEC.

“This is an important step for a valuable initiative that could have meaningful implications for market quality,” said SEC Chair Mary Jo White. “I look forward to the public comment on the proposal and the expeditious development of a final pilot program.”