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Your opinions will help inform STANY's Comments to the SEC

Last week, the much anticipated proposal to establish a national market system plan (the Plan) to implement a 12-month pilot program that will widen minimum quoting and trading increments for certain stocks with smaller capitalization was filed with the Commission. This marks an important step in the move toward alternative MPVs that started with the implementation of the Jumpstart Our Business Startup Act (JOBS Act) in 2012. Since then, members of Congress and industry professionals have urged the Commission to conduct further study of alternative MPVs. In a letter to the Commission 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.

Since the Commission first began to explore whether wider tick sizes would benefit trading in the securities of small capitalized companies, we have heard positive, neutral, and negative commentary about the efficacy of spreads larger than a penny. These discussions became more focused with the  Commission’s June 24th publication of an Order Directing the Exchanges and The Financial Regulatory Authority To Submit a Tick Size Pilot Plan,

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.

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

  • Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share, and trade at the increments currently permitted. The control group would represent a baseline for analysis during the pilot period.

  • Pilot securities in the first test group will be quoted in $0.05 minimum increments.  Trading would continue to occur at any price increment that is permitted today.

  • Pilot securities in the second test group will be quoted in $0.05 minimum increments, and traded in $0.05 minimum increments subject to certain exceptions.

  • Pilot securities in the third test group will be subject to the same minimum quoting and trading increments (and the same exceptions) as the second test group, but in addition would be subject to a “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.

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 industry has been vocal in its charge that regulatory change should be guided by empirical data. Under the terms of the Plan, FINRA and the Exchanges, Trading Centers, and Market Makers will collect and provide just such data to the SEC to help it assess the impact of quoting and trading in MPVs of a nickel. It remains to be seen whether one or more of the three tests will have a positive impact on trading 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

In a letter to the Commission (April 4, 2014) concerning JOBS ACT initiatives, KOR Group 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

The Plan has been filed with a 21 day comment period. STANY’s Trading Issues committee welcomes and encourages you, the Association members, to send any comments, concerns, and suggestions to us. Rest assured, your specific comments will not be shared with attribution, unless you specifically give us permission to do so. Your input is needed so that STANY can truly represent the sentiments of the community in comments to the Commission. As an association of traders run by traders, your opinions matter. Please send any comments about the tick-size pilot and other market structure issues of concern to Kimberly Unger at kimu@stany.org or call 212.344.0410.

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