The SEC recently approved a proposal by the national securities exchanges and FINRA for a two-year pilot program to widen tick sizes for prices of certain smaller company common stock. The SEC adopted the tick size pilot following its study of tick sizes pursuant to Section 106 of the JOBS Act. In June 2014, the SEC ordered the national securities exchanges and FINRA to develop and file a proposal for a tick size pilot program. On August 26, 2014, the SEC announced that the national securities exchanges and FINRA had filed a proposal to establish a national market system plan to implement a targeted tick-size pilot program. The two-year tick size pilot that the SEC approved, which included a number of changes from the proposed pilot submitted to the SEC, will begin by May 6, 2016.
The tick size pilot will include stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less, and a volume weighted average price of at least $2.00 for every trading day. The pilot will consist of a control group of approximately 1,400 securities and three test groups with 400 securities in each, which will be selected by a stratified sampling. During the pilot: (i) the control group will be quoted at the current tick size increment of $0.01 per share and will trade at the currently permitted increments; (ii) the first test group will be quoted in $0.05 minimum increments but will continue to trade at any price increment that is currently permitted; (iii) the second test group will be quoted in $0.05 minimum increments and will trade at $0.05 minimum increments subject to a midpoint exception, a retail investor exception, and a negotiated trade exception; and (iv) the third test group will be subject to the same terms as the second test group and also will be subject to the “trade-at” requirement to prevent price matching by a person not displaying at a price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies. In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions similar to those under Rule 611 of Regulation NMS will apply.
According to the SEC, the exchanges and FINRA will submit their initial assessments on the tick size pilot’s impact 18 months after the pilot begins, based on data generated during the first 12 months of its operation.