SEC-mandated trial seeks to encourage longer-term trades and boost liquidity of smaller stocks
Stock exchanges in the US will experiment with trading in stock tick sizes of five cents in hopes that the larger size will boost liquidity for many companies.
The experiment, requested by the SEC in June, will temporarily raise the minimum trading increments from the current standard of one cent for certain companies with market valuations of less than $5 bn. The 12-month pilot program is meant to determine if it encourages more trading in those securities.
The plan, which is open for a 21-day comment period before testing begins, also requires that stocks used in testing have an average trading volume of less than 1 mn shares a day and a closing price of more than $2 as of the start of testing.
The pilot program comes in response to criticism that the change in 2001 to a $0.01 tick size from the fractional system with increments of as little as 1/32 of a dollar encouraged fast, short-term trading and favored large cap stocks.
NASDAQ OMX, the New York Stock Exchange, the Chicago Stock Exchange, the Financial Industry Regulatory Authority and others will conduct the experiment using three groups of 400 stocks plus a control group, according to the plan filed with the SEC.
Stocks in the first of the three groups subjected to changes will be quoted throughout the test period only in increments of $0.05 but will be allowed to trade at the currently allowed tick sizes. The second will be quoted and traded in $0.05 increments except in a few circumstances such as negotiated trades.
The third group would also be quoted and traded in $0.05 tick sizes but will be subject to a ‘trade at’ prohibition, meaning participant trading centers would be prevented from executing a sell order at the price of a protected bid, or a buy order at the price of a protected offer, unless the trading center displays the best bid or offer.
