Why The SEC Tick Size Pilot Is Ending

By: Wayne Duggan

The SEC’s tick size pilot program will not be continued past the test period’s October expiration, the regulatory body announced earlier this month, marking the end of the two-year program.

Here’s an overview of the goals of the project and why the SEC is throwing in the towel.

Goals Of The Test

The SEC began the tick size test back in 2016 in an effort to increase liquidity and decrease volatility and risk among thinly traded small-cap stocks. 1,400 small-cap stocks had their minimum trading increments increased from 1 cent to 5 cents. Each of the stocks chosen had market caps below $3 billion and an average daily trading volume below 1 million shares.

The SEC was hoping that the minimum 5-cent spread between the bid and ask would encourage brokers to make more of a market for these stocks, thereby improving liquidity. There was also a hope that positive results from the test would encourage smaller companies to go public. The stocks included in the test were so thinly traded that most traders likely did not even notice a change had taken place.

Test Results

Unfortunately, the test results were lackluster at best. The Wall Street Journal reported that trading volumes of the stocks included in the test have not increased since the test began. Other studies even found that the test stocks actually experienced a decrease in liquidity and no meaningful change in the risks associated with low liquidity, and retail brokers are happy to see it end.

“The tick pilot isn’t working,” Richard Johnson, vice president of market structure and technology at Greenwich Associates said last year. “There are some who just think they should cancel it now.”

Next Course Of Action

Just because the tick size pilot didn’t produce the results the SEC had hoped for, doesn’t mean the pilot and other similar efforts are a waste. Steven Lofchie, a co-chair of the Financial Services Group, recently wrote that pilot testing is a safe way to potentially implement rule changes that could have an unforeseen impact on the market.

“The notion of testing Transaction Fees seems a much better idea than the SEC’s prior major test of tick sizes, which seemed highly unlikely to produce any meaningful results,” Lofchie wrote.

SEC chairman Jay Clayton has said there will be a roundtable discussion on April 23 to consider the next step for the tick size pilot and determine other possible ways to improve market liquidity. At the Equity Market Structure Symposium earlier this month, Clayton said the SEC is currently focused on a potential test to assess the impact of rebates and access fees on equity trading and new rules related to transparency for alternative trading systems and broker order routing.

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