Wednesday, September 12, 2018

SEC tick size pilot to expire without fanfare

By Amanda Maine, J.D.

The SEC issued a statement on Monday announcing that that its National Market System Plan to Implement a Tick Size Pilot Program (the Tick Size Pilot) will expire at the end of trading on Friday, September 28, 2018. The two-year Pilot had was set to expire at the end of trading on Tuesday, October 2; however, the SEC received several requests to terminate the Pilot on September 28 to address potential operational concerns raised by a mid-week shift in the quoting and trading increments of a large number of NMS stocks.

Accordingly, the Commission ordered that Pilot Securities under the program will be subject to the regular quoting and trading requirements otherwise applicable to NMS stocks on Monday, October 1, 2018. The data collection and reporting requirements will continue for six months after the end of the pilot period.

Tick Size Pilot. The Tick Size Pilot was approved in May 2015 and commenced operation on October 3, 2016. The stated purpose of the Pilot was to allow the Commission, market participants, and the public to study and assess the impact of wider minimum quoting and trading increments—tick sizes—on the liquidity and trading of the common stocks of certain small-capitalization companies. The Pilot included a control group of securities that would continue to trade in $0.01 increments, and three test groups of securities that were quoted in $0.05 increments. Test Group 1 securities would continue to trade in $0.01 increments, while securities in Test Groups 2 and 3 would trade in $0.05 increments, with Test Group 3 securities also subject to a “trade-at” prohibition.

The decision to let the Pilot expire was not unexpected. During an April 2018 speech at the Equity Market Structure Symposium in Chicago, Division of Trading and Markets Director Brett Redfearn had indicated his belief was that the best course of action would be to end the Pilot as scheduled.

The Tick Size Pilot has not been without its critics. For example, the Wall Street Journal and reported last week that a recent study by Pragma Securities, a quantitative trading technology firm, found that the Pilot will have cost investors more than $300 million in excess trading costs by the time it is terminated.