SEC Could Test Bigger Tick Sizes for Smaller Stocks
February 5, 2013
Investors, exchanges and other market participants will tell the U.S. Securities and Exchange Commission that changing “tick size” for some stocks can help fuel growth by making it easier for emerging firms to go public.
Tick size, the minimum quoting increment for stock trades, are the focus of a roundtable discussion led by SEC staff at the agency’s headquarters in Washington today. Three panels will examine issues including whether larger increments for shares of smaller companies would increase trading activity and lead to more initial public offerings.
“You would see deeper liquidity in these small- and mid- cap stocks, and once you start to see deeper liquidity, the idea is it becomes a virtuous circle,” Eric Noll, executive vice president of transaction services for Nasdaq OMX Group Inc., said in a telephone interview yesterday. “Ultimately that makes the market more robust for IPOs and capital formation for companies looking to go public.”
After today’s discussion, which involves executives from companies such as exchange operator Nasdaq, online brokerage TD Ameritrade Holding Corp. and venture capital firm Andreessen Horowitz, SEC commissioners may consider a pilot study of larger tick sizes for selected stocks, according to a study the agency’s staff issued in July.
“I know that many feel today’s market structure including the current tick size regime does not recognize the particular needs of smaller companies, and that a detailed examination of the current structure is important and appropriate,” SEC Chairman Elisse B. Walter said at today’s meeting.
Stocks of smaller companies tend to trade more lightly because they have fewer shares available to the public. Incentives to buy and sell the stocks were further reduced by a series of SEC decisions between 1997 and 2001, David Weild, a senior adviser at Grant Thornton LLP, wrote in a statement for the meeting.
While the SEC’s 2001 mandate for “decimalization,” or trading in decimals instead of fractions, reduced the cost to buy or sell shares, it also reduced incentives for investment banks to make markets in lightly-traded stocks. Combined with technology changes and rules that boosted competition, the change decreased the profitability of equity dealers, who used money earned on wider bid-ask spreads to fund analyst research.
“If the SEC allows for a pilot program to test the markets with increased tick increments for trading in small capitalization stocks, then firms like ours will find it economically feasible to begin writing research on small capitalization stocks again,” Jeffrey M. Solomon, chief executive officer of investment bank Cowen & Co., wrote in prepared remarks.
Critics of decimalization point to a sharp decline in the number of initial public offerings since 2001. About 150 to 350 IPOs raised less than $25 million each year from 1991 to 1997, according to data compiled by Grant Thornton. Fewer than 50 companies did so annually beginning in 2000, the data show.
Under a 2012 law, the Jumpstart Our Business Startups Act, the SEC is charged with deciding whether tick sizes for emerging growth companies should be higher than one cent but lower than 10 cents.