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Waiting for the Tick Size Pilot

As we wait for FINRA and the Exchanges to file a plan to implement the much awaited “tick-size pilot”, STANY’s Trading Issues Committee has solicited and considered opinions on the parameters of the program outlined by the Commission. Almost without exception, the industry, since the implementation of the Jumpstart Our Business Startup Act (JOBS Act) in 2012, has urged the Commission to conduct further study of alternative MPVs. In a letter to theCommission dated August 7, 2012, STANY likewise, encouraged the Commission to explore the potential benefits of rethinking the “one-size-fits-all” approach to tick sizes.

Even though it has been two years since the passage of the JOBS Act, it is too soon to do anything but speculate on the impact of wider tick sizes on trading in small-cap stocks. Since the Commission’s June 24th Order Directing the Exchanges and The Financial Regulatory Authority To Submit a Tick Size Pilot Plan, we have heard positive, neutral, and negative commentary about the efficacy of the anticipated pilot.

The stated purpose of SEC’s proposed tick size pilot is to explore whether MPVs greater than a penny would have a positive impact on trading in thinly capitalized securities. Data collection and analysis, rather than a specific outcome, appear to be the goal of the Commission. The three test groups, the limited duration of the pilot, and the prescribed six-month post-pilot analysis of the data collected prior to further action on the part of the Commission, all point to a pilot intended to gather empirical data.

Whether you believe that one, or more, of the three alternative approaches to widening tick sizes will achieve the results hoped for by Congress in passing the JOBS Act and discussed at great length in several Congressional Hearings—increased research and aftermarket support of small-cap companies–the industry should commend the SEC for its approach to the question of quoting in wider increments. For years the hue and cry from the industry has been that empirical data, rather than speculation or "knee-jerk reactions" should quide regulatory change. Upon implementation of the pilot, the SEC will collect just such data on quoting and trading in MPVs of a nickel. It remains to be seen whether the tests as implemented by FINRA and the Exchanges will have a positive impact on trading in equity securities of companies with smaller capitalization, but that, after all, is what the test is all about.

Several thought-provoking pieces have been written about the possible effects of the proposed tick size tests. Likewise, industry participants have made suggestions on alternative tests and approaches to tick size changes.  For more information and alternative views, we recommend that you consider reading the following articles and letters:

KCG’s Phil Mackintosh’s analysis of Who Gets the Short End of the ‘Tick https://www.kcg.com//uploads/documents/KCG_Tick_Size_Analysis_Final.pdf

Paul Daley, of SunGard’s Fox River Execution writing for the TABB Forum offers A Nickel for Your Thoughts http://tabbforum.com/opinions/a-nickel-for-your-thoughts-the-sec-tick-size-pilot-program

Daniel Keegan, Managing Director, Head of Equities of the Americas, Citi’s comments on equity market structure to the Commission (August 7, 2014), raise issues about the proposed pilot, and makes suggestions for changes to exchanges fees. http://www.sec.gov/comments/s7-02-10/s70210-416.pdf

KOR Group, in a letter to the Commission (April 4, 2014) concerning JOBS ACT initiatives, makes their case for adopting a Trade-at regime and re-examining Maker-Taker. http://kortrading.com/wp-content/uploads/2014/04/KOR-Comments-File-No.-S7-02-10-and-4-657.pdf

Several earlier thought-pieces also provide some color on the tick size debate:

Themis Trading’s Joe Saluzzi opines on Why Wider Tick Sizes Would Help Small Caps, and Why Internalizers Hurt http://tabbforum.com/opinions/why-wider-tick-sizes-would-help-small-caps-and-why-internalizers-hurt

David Mechner, of Pragma makes his case against a pilot in The Small-Cap Large-Tick Pilot: Don't Do It! http://tabbforum.com/opinions/the-small-cap-large-tick-pilot-dont-do-it

STANY’s Board of Directors and its Trading Issues Committee are anxiously awaiting filing of the pilot by FINRA and the Exchanges due to be submitted this week. There will be a comment period prior to implementation of the pilot and we welcome and encourage you, the Association members, to send any comments, concerns, and suggestions to us. This will help us represent the sentiments of the community in comments to the Commission. As an association of traders run by traders, your opinions matter to STANY. Send any comments about the tick-size pilot and other market structure issues of concern to Kimberly Unger at kimu@stany.org.

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