Thursday, August 28, 2014

SEC Proposes 12-Month Pilot Program on Wider Tick Sizes

[This story previously appeared in Securities Regulation Daily.]

By Amanda Maine, J.D.

The SEC announced that the Financial Industry Regulatory Authority (FINRA) and the national securities exchanges have filed a proposal to implement a pilot program that will widen the minimum quoting and trading increments (tick sizes) for smaller companies. The exchanges and FINRA will collect data and provide it to the SEC, who will make the information available to the public. The exchanges and FINRA will assess the impact of the pilot program after 12 months and submit the assessment to the SEC.

Pilot securities. Under the pilot program, pilot securities will consist of common stocks with a market capitalization of $5 billion or less and a closing price of at least $2.00. Their consolidated average daily volume will be 1 million shares or less, and the securities must have a measurement period volume-weighted average price of at least $2.00. The SEC will use stratified sampling to select 400 securities from 27 categories in each test group.

Test groups. The pilot securities will be divided into four groups: a control group and three test groups. Control group securities may be quoted at the current tick size of .01 and traded at any price increment that is currently permitted. Pilot securities in Test Group One will be quoted in .05 minimum increments but may continue to trade at any price increment that is currently permitted. Pilot securities in Test Group Two will be subject to the same quoting requirements of Test Group One but may only be traded in .05 increments, with certain exceptions. Pilot securities in Test Group Three are subject to the same minimum quoting and trading requirements as Test Group Two; however, they will also be subject to a “trade-at” prohibition. Under the prohibition, the plan will prevent a trading center that was not quoting from price-matching protected quotations (and permit a trading center that was quoting at a protected quotation) to execute orders at that level, but only up to the amount of its displayed size. The trade-at prohibition is also subject to certain exceptions.

SEC Chair Mary Jo White called the program “an important step for a valuable initiative that could have meaningful implications for market quality.” The comment period for the proposed pilot program will be open for 21 days.

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