Wednesday, February 04, 2015

Senators Urge Greater Length, Clarity, and Simplicity in Tick Size Pilot Program

[This story previously appeared in Securities Regulation Daily.]

By Joanne Cursinella, J.D.

Senator Mark Warner (D-Va) and Sen. Pat Toomey (R-Pa) have urged the SEC to prioritize “robust and effective” implementation of the proposed national market system plan to implement a tick size pilot program. In a recent letter to Chair Mary Jo White, while applauding the Commission’s efforts to prioritize the needs of small business in American capital markets, the senators warned that “proper implementation is vital to achieving the stated purpose of the Pilot.”

Length matters. The tick size pilot proposal would change the minimum price increments at which certain small capitalization stocks are traded on U.S. exchanges to both encourage research and investment in the stock and to ensure adequate liquidity in the secondary market. The senators worry, however, that the one-year duration of the pilot program is too short to attract the interest from market participants necessary to adequately gauge the program’s success. Changing the infrastructure to accommodate wider spreads takes both time and financial investment, which are less likely for to make sense for participants if the pilot does not run long enough, they say.

Simplicity and clarity matter. Also in the interests of greater participation, the senators emphasized that simplicity and clarity must be “powerful guiding principles” in implementation of the pilot. To this end, they encouraged the Commission to create a “broadly supported and measurable definition of liquidity” at the outset. This way, participants and observer s will gain a quantifiable way to measure the pilot’s success. They also questioned whether the market capitalization limits are too large to keep the focus of the program on the small capitalization companies facing the most severe liquidity crisis in the markets, so they asked the Commission to reexamine the levels to best serve the interests of the program.

“Asking the pilot to do too much or otherwise creating barriers to participation due to complication would place an unfortunate and unnecessary burden that could hinder the Commission’s promising efforts so far,” they said.