The US Securities and Exchange Commission (SEC) has ordered exchanges to make plans for a national minimum tick-size pilot scheme which it is hoped will bolster interest in small- and mid-cap stocks.
By the end of August. exchanges and the Financial Industry Regulatory Authority (FINRA) must jointly submit a plan to the regulator on how to implement the pilot.
The scheme will cover 1,200 stocks in total, consisting of a control group and three test groups of 300 names each. Securities in the scheme must have a market cap of no more than US$5 billion, average daily trading volume of one million shares or less and a share price of at least US$2.
The control group will feature a quote increment of US$0.01 and no other restrictions. Test group one will up this quote increment to US$0.05, while test group two will also have a trade increment of US$0.05 and its definition of significant price improvement will be US$0.005 per share.
The third test group will be similar to group two, but also feature a block size exception of 10,000 shares or US$200,000 and will be not be traded on any venue that does not display a quote.
Supporters of increased minimum tick sizes for less liquid stocks believe that it will improve investor interest in small- and mid-cap stocks, which can be difficult to trade due to the low potential for price improvement coupled with a lack of shares. It is hoped that by being able to achieve a minimum level of price improvement when trading these securities, the buy-side will be more willing to invest.
The scheme is set to run for one year, though the SEC has not confirmed when it will begin. TABB Group senior analyst Sayena Mostowfi said it will likely not be implemented until at least Q2 2015. Once the plan has been received, the SEC will publish it in the Federal Register for further public comment.