US unveils details of two-year tick size scheme

US regulators have confirmed details of a pilot scheme to test the impact of tick-sizes on liquidity in smaller stocks.

US regulators have confirmed details of a pilot scheme to test the impact of tick-sizes on liquidity in smaller stocks.

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) told US exchanges last year to submit proposals for how such a pilot scheme might work.

The SEC has now revealed it will run a pilot for two years, which will widen the minimum tick size for a number of small-cap stocks.

Market participants will have a whole year to prepare for the scheme, which will begin on 6 May 2016.

Regulators wants to see whether wider tick sizes for small-cap stocks can improve market quality and provide benefits to issuers and investors. Some critics of the existing tick size regime state that small tick sizes favour investment in larger and more liquid names.

Stocks eligible for the scheme will have a market capitalisation of $3 billion or less and an average daily trading volume of one million shares or less, with a volume weighted average price of at least $2 each trading day.

The scope of the scheme is vast, and will cover 1,400 securities split into three test groups.

The first test group will quote in $0.05 increments and trade at any price increment permitted. The second group will also quote in $0.05 increments but will also trade in $0.05 increments except for certain exceptions such as trading at midpoint.

A final test group will be subject to the same rules at the second group, but will also be subject to the “trade-at” rule, which prevents price matching by anyone not displaying at a price at a trading center’s best protected big and offer. These test groups will be accompanies by a control group, which will be subject to a $0.01 increment, the current minimum for US equities.

The SEC will release data generated during the pilot on a regular basis and analyse the wider impact tick sizes are having on smaller stocks.

Mary Jo White, chair of the SEC, said: “The data generated by this important market structure initiative will deepen our understanding of the impact of tick sizes on market quality and help us consider new policy initiatives that can improve trading in the securities of smaller-cap issuers.”

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