Politicians are being unrealistic about what a minimum tick size regime can achieve for the US economy, according to Paul Daley, head of execution and account management at broker-dealer SunGard Fox River.
The comments come after Securities and Exchange Commission (SEC) commissioner Michael Piwowar told an industry conference that the SEC is close to deciding whether to launch a pilot scheme that would increase minimum tick sizes for mid- and small-cap stocks.
Reforming tick sizes, which determine the spread between buy and sell orders of a stock, was mandated as part of the 2012 Jumpstart our Business Startups, but has yet to be enacted.
Some politicians believe the move will encourage more small firms to seek an IPO and also boost job numbers, but Daley believes this is misguided.
“Small tick sizes, called penny spreads, can be an issue for institutional investors as they make it more difficult for them to trade in size, so there could be some benefits for those investors,” he said.
“But the problem is politicians think we’ll see more companies being listed and lots of job creation as a result of this and no one in the industry thinks this is a realistic outcome.”
However, he welcomed Piwowar’s comments that the SEC is looking to take on the issue.
“This has become a really political issue, but if Congress legislates on tick sizes then we’ll end up with a very rigid regime which will be difficult to change if it turns out to be harmful,” he added.
Currently, the SEC can either ask the industry to devise a pilot programme to test the effects of minimum tick sizes or it can issue an order telling US exchanges to develop a test regime. Citi has already put forward a plan to the SEC for how a minimum tick size regime would work, but as yet no exchanges have publicised their own ideas.
If it does neither, politicians will intervene and implement their own programme. Piwowar expressed a preference for a SEC-led pilot at a Securities Industry and Financial Markets Association (SIFMA) conference last week.
Supporters of minimum tick sizes claim they would improve liquidity for small- and micro-cap stocks as wider spreads would mean brokers and market makers would be more likely to trade them as they could make money on the spread.
However, Daley said research by SunGard Fox River indicates that many small-caps are as liquid as larger-cap stocks once the number of shares available are normalised.
“Affected securities with tighter spreads will most likely suffer in volume and liquidity (particularly for the low priced stocks with narrow spreads) while stocks with already wide spreads have the potential to benefit,” he said, adding, “market makers for the stocks with narrower spreads will benefit at the expense of investors who wish to trade them.”
Piwowar told the SIFMA conference that deciding which stocks should be placed in a minimum tick size regime would be a crucial decision for the SEC. He said the pilot scheme may need to divide names into several buckets determined by either market capitalisation or traded volume. Several control groups will also be needed to test the full effects of the changes against normal movements in share prices.