SEC Tick Size Pilot Program

The Securities and Exchange Commission (SEC) released for comment the long-awaited Tick Size Pilot Program. The SEC is concerned that the one penny minimum price variation (MPV) introduced in April 2001 to the industry as Decimalization may be detrimental to small- and middle-sized companies. Studies suggest that decimalization reduced incentives for underwriters to support public offerings of smaller companies, constricted the production of sell-side research on these companies and discouraged making markets in these company’s stocks.

The genesis of this Program goes back to the 2012 Jump Start Our Business Start Up (JOBS) Act. Included in this Act is a directive to the SEC to study and report how decimalization affected the number of initial public offerings (IPOs) and the liquidity and trading of small capitalization stocks (Small Caps). The study was conducted and the report was provided to Congress in the July 2012 Decimalization Report.1

The Decimalization Report did not reach any concrete conclusions related to the impact of decimalization on the number of IPOs or the liquidity and trading of small capitalization company’s securities. The Report did recommend that the SEC continue to study the matter.

The SEC held a public roundtable in 2013 that included participantfrom the markets, academics, broker-dealers, accounting and law firms. The groups agreed to recommend the SEC conduct a Pilot Program to gather additional information. The Program is designed to study and assess the impact of wider tick sizes on liquidity in small capitalization companies.

The Plan is out for comment, and the SEC will vote on implementation upon closure of the comment period as well as vote on whether or not to make the program permanent after the one-year pilot.

Included in the Plan is a requirement for all the Market Centers and FINRA to adopt rules to require their Participants and Members to follow its requirements.

1See Report to Congress on Decimalization available at: http://www.sec.gov/news/studies/2012/decimalization-072012.pdf.

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