The Securities and Exchange Commission (SEC) is mulling a pilot program to test determine whether larger trading increments would trigger more active trading in the small-cap market and result in subsidized analyst research on small stocks.
The theory is that wider tick sizes would expand the spread between bid and offer prices and drive higher profits for market makers who, ideally, would subsidize research and draft revived interest in small stocks.
Supporters of the program say wider minimum tick sizes will spur an increase in the number of small companies going public, while cynics contend the program will cause people to shell out more money when they trade with slim to no benefit to the companies.
Regardless, the answer may be a long time coming. Experts say that even a well-designed pilot program would take at least five years to generate relevant data that could provide an accurate verdict.
OTC Markets Group CEO R. Cromwell Coulson told Bloomberg that the pilot program should require market makers to indicate minimum quote size to safeguard the depth and liquidity of the market, which he believes would increase investors’ inclination to trade.
Some believe higher tick sizes will revive capital formation, generate jobs by supporting small public companies, and boost investor confidence to grow the small IPO market, which they say was roiled by decimalization, the rule implemented in 2001 to replace fractions in stock prices with penny increments.
Dissenters argue that narrowed tick sizes encourage securities firms to buy and sell more shares by making it more profitable for them to do so.
Another consideration is whether or not each company should be able to choose its own tick size, while skeptics point out that the benefits, if any, of varying tick sizes are unknown.
SEC spokeswoman Judith Burns declined to say when the program might be approved, though the program would likely be launched under the SEC’s next chairman, who at this point may be Mary Jo White, President Barack Obama’s nominee as the agency’s next chairman.
Earlier this month at her nomination hearing before the Senate Banking Committee, White told senators that she that one tick size “doesn’t necessarily fit all,” but that “Clearly, it’s a priority to focus on that issue.”
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