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Clearpool Reviews the SEC's Tick Pilot

Traders Magazine Online News, July 17, 2018

John D'Antona Jr.

So, what can the markets learn in year?

Nothing? Plenty? More than likely something in between to be sure. On October 31, 2016 the Securities Exchange Commission (SEC) rolled out its implementation of the Tick Size Pilot (TSP). The pilot was designed to evaluate whether or not widening the tick size for 1,200 small cap securities would positively impact trading, liquidity and market quality of those securities.

Fast forward one year and the analysts at Clearpool have shared their thoughts with Traders Magazine and offered their insights.

In looking back, Clearpool’s initial analysis of the TSP found a shift in liquidity from off-exchange venues to exchanges in G3 and a shift from maker/taker to inverted exchanges across all test groups. Other studies also found that impact costs increased as the spreads widened, but Clearpool did not observe the same result. Clearpool observed a decrease in high-impact liquidity removal versus the Control Group.

“Our ability to dynamically adapt to passively source liquidity and cross the spread in a manner that reduced overall impact helped us achieve improved impact costs,” Clearpool analysts noted. “In our initial observation, we concluded that the pilot may be showing signs of improved liquidity capture for institutional investors. At that time, we committed to measure and report the results of the pilot in the future.”

That was then. This is now. So, what gives.

“After a year of collecting and analyzing data, it is our assessment that the pilot has not completely achieved its overall intended objective,” they wrote. “That said, it has highlighted some interesting dynamics that affect market microstructure. One objective of the pilot is to encourage more trading of small cap stocks on the exchanges, essentially displacing that flow from dark venues. It is our observation that the pilot has been successful in transferring flow from maker/taker to inverted exchanges, as competition in maker/taker exchanges increased.”

Also, while one goal of the pilot was to move trading from dark venues to exchanges, Group 3 was the only group where we consistently observed a decrease in off-exchange liquidity, which Clearpool attributes to the Trade At requirement. Starting in Q2, the firm observed a shift in flow from off exchange venues to the inverted exchanges such as Nasdaq BX, Cboe BYX, IEX, Cboe EDGA, NYSE American). Clearpool thinks this is an effect of the adjustments that were made to manually-adapted algorithms after brokers had the opportunity to assess their initial findings.

Did liquidity beget liquidity?

Midpoint liquidity, the analysts wrote, increased for all groups compared to the Control Group. Specifically, as liquidity shifted to the exchanges and pooled around fewer ticks, there were more opportunities to access midpoint liquidity on both maker/taker and inverted exchanges. In Group 3, where there is an exemption for blocks, the firm observed increased midpoint volume off-exchange compared to G1, G2 and the Control Group.

And what about block trades and overall trade size?

Zilch as block liquidity and average trade size remained steady The pilot defines block liquidity as equal to or greater than 5,000 shares or $100,000 notional.

“We did not observe any significant increase in block volume relative to the Test Groups versus the Control Group. There was also no significant change to average trade size, as liquidity pooled at the larger tick,” Clearpool noted.

For the complete report from Clearpool, please click here

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