Today, the two-year tick size pilot program, which was proposed by the national securities exchanges and FINRA in June 2014 and approved by the SEC in May 2015, officially commenced. The pilot program is a data-driven test to evaluate whether or not widening the minimum quoting and trading increments (“tick sizes”) for stocks of smaller capitalization companies would impact the trading, liquidity and market quality of those stocks. The SEC modified several provisions of the pilot program initially proposed by the national securities exchanges and FINRA. A variety of data generated during the tick size pilot will be released publicly on an aggregated basis to assist in analyzing the impact of wider tick sizes on smaller capitalization stocks. In addition, the national securities exchanges and FINRA must submit their initial assessments of the pilot program’s impact by April 1, 2018 based on data generated during the first 12 months of the pilot program’s operation.

The pilot program includes 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 program consists of a control group of approximately 1,400 securities and three test groups with 400 securities each, selected through stratified sampling. For the duration of the pilot program: (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.