Through a proposed pilot programme for tick size reform among US small- and mid-cap stocks announced this week, Citi aims to generate data to help steer the industry away from major structural changes like a ‘trade-at’ rule.
The proposal, included in submission letter to the Securities and Exchange Commission (SEC) dated Tuesday, suggests the regulator back a three-pronged pilot pogramme to widen tick sizes. The regulator first mooted such a programme as part of the Jumpstart Our Business Startups Act, to drive investment into small- and mid-cap companies.
Under the Citi proposal, participating illiquid and small- and mid-cap stocks would be divided into three categories, or ‘buckets’, and subject to slightly differing rules. One of these buckets would serve as a proxy for the ‘trade-at’ rule.
“We feel this is a more targeted and nuanced approach to improving current market structure, as opposed to some more draconian measures like a ‘trade-at’ rule,” the letter, authored by Daniel Keegan, head of equities for the Americas, Citigroup Global Markets, read.
A ‘trade-at’ rule would effectively force flow back onto exchanges from alternative trading systems and internal broker matching systems unless such facilities could offer meaningful price improvement compared to lit markets.
Speaking to theTRADEnews.com, Michael Masone, general counsel, Citigroup Global Markets, said the proposal was generated with a view to serving buy-side clients alongside retail investors.
“The Citi proposal has a focus on retail investors, but a number of our long-only buy-side clients have also expressed concerns about trading small- and mid-cap names, and we drafted this proposal because that is a concern shared across the industry,” he said.
If the pilot programme shows promise, Masone believes retail and institutional investors would show greater willingness to trade in these traditionally less-liquid names, bringing money into the equity market from other asset classes.
But, he said, the importance of collecting relevant data on which to base future regulatory decisions, was key.
“The three-bucket approach we have suggested will let the data dictate the regulatory decisions made after such a pilot program ends. The focus is, and should be, on measuring the explicit and implicit costs of trading in these names and crafting rules suitable to activity in those stocks.”