SEC Approves Pilot to Assess Tick Size Impact for Smaller Companies

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On May 6, the Securities and Exchange Commission approved a proposal by the national securities exchanges and the Financial Industry Regulatory Authority to implement a two-year pilot program that widens the permissible minimum quoting and trading increments—or tick sizes—for stocks issued by smaller companies.

The pilot program will include approximately 1,400 securities consisting of stocks issued by companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less and a volume weighted average price of at least $2.00 for every trading day. The stocks in the pilot program will be divided into a control group and three test groups with 400 securities in each test group. Pilot securities in the control group will continue to be quoted and traded at any price increment currently permitted. Securities in the first test group will be quoted in $0.05 minimum increments, but orders priced to execute based on the midpoint could be ranked and accepted in increments of less than $0.05. Securities in the second test group also will be quoted in $0.05 minimum increments, and will trade at $0.05 minimum increments, subject to certain exceptions. Securities in the third test group will be subject to the same conditions as the second test group, but will be subject to a trade-at prohibition to prevent price matching by a trading center that is not displaying the best bid or offer.

Data generated during the pilot program will be made public to assist in determining the program’s impact on smaller capitalization stocks. The exchanges and FINRA will submit their initial assessments of the pilot program’s impact 18 months after the program begins based on data generated during the first 12 months of its operation.

Notice of the SEC’s order of approval is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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