A pilot programme to widen tick sizes in small- and mid-cap US equities would increase dark activity and passive trading strategies, research from Societe Generale has found.
The French bank conducted analysis of data from Japanese and European markets showing wider tick sizes may increase liquidity, but would increase off-exchange trading.
A plan to widen tick sizes through the Jumpstart Our Businesses (JOBS) Act has the backing of the Securities and Exchange Commission, which is seeking industry comment on the idea.
Despite SEC support, the underlying concept behind including tick size reform in the JOBS Act – that it will lead to greater investment in these companies by increasing liquidity in their equity – has been refuted in recent weeks by market participants.
Richard Johnson, head of quantitative electronic services, Americas, for Societe General told theTRADEnews.com the analysis showed a correlation between wider tick sizes and displayed liquidity, but said a tick size pilot would impact venue selection.
“The evidence we have compiled shows that wider tick sizes could affect venue selection in trading US stocks, and make trading in dark pools more attractive as traders try to execute at the mid point before crossing the spread,” Johnson said.
“Passive trading will also be more attractive and as such we predict there would be more activity on inverted exchanges where participants pay to add liquidity and receive a rebate to take liquidity,” he said.
Johnson added that the data showed that buy-side traders would have to become more comfortable with getting ahead of schedule when using volume weighted average price algorithms and to post in larger size.
The SEC has no schedule by which to implement a tick size pilot, although there is an expectation the Commission will not include tick size reform within a holistic review of US market structure it intends to perform in the coming years.
In January, the SEC’s Investor Advisory Committee voted against supporting a tick size pilot programme and several buy-side firms have said such a programme would not increase liquidity or investment in small and mid-cap names but hike costs and complexity for investors.