Thursday, May 30, 2013

Bi-partisan House Legislation Would Expand Tick Sizes in Wake of Decimalization


Rep. David Schweikert (R-AZ), a primary author of the JOBS Act  has introduced the Spread Pricing Liquidity Act, HR 1952, to give small companies with limited market capitalization greater access to public equity.  According to Rep. Schweikert, the bill responds to overwhelming evidence that wider ticks for small-cap companies will stimulate liquidity, encourage capital formation, and grow jobs. The  Congressman said that  the SEC has been inactive on this issue. He also noted that since the introduction of decimalization the number of public companies has decreased by one-third.

The introduction of decimalization a decade ago changed all stock quotes to a penny. This penny quoting is widely believed to be the direct cause of the erosion of the economic infrastructure required to support small-cap stocks, said Rep, Schweikert. He added that such narrow spreads create a disincentive to provide liquidity at the best price, which results in smaller quoted sizes and thinner markets. In addition, narrow tick sizes also create inefficiencies and detrimentally affect the price discovery process.

He believes that wider tick sizes will increase investor confidence by reducing the number of price points at which stocks are traded and by limiting computer trading behaviors. Wider ticks favor long-term investors and stock pickers over short-term traders. In addition, they will lead to investment in the securities ecosystem necessary to provide visibility to companies going public and support them in the aftermarket.

The Spread Pricing Liquidity Act allows companies with public float of less than $500 million and average daily trading volume under 500,000 shares to select to have their securities quoted at increments of either 5 or 10 cents, while maintaining trading between the quoted ticks.

The bill includes a multi-tiered phase-in, with the change occurring for companies with public float of less than $100 million and average daily trading volume under 100,000 shares at inception. After three months, that threshold will rise to include companies with public float of less than $250 million and average daily trading volume under 250,000 shares. After a further three months, the threshold will rise again to the stated public float of less than $500 million and average daily trading volume under 500,000 shares.

The Act includes an opt-out for companies after six months, and a re-opt in a full year later, and provides a three month grace period for companies cresting through either the float or volume thresholds before they revert to trading at traditional increments.

The bill disallows exchanges from charging maker/taker fees, and requires the SEC to report to Congress on the effectiveness of wider ticks for small-cap companies nine months after implementation.

No comments: