SEC Weighs Bigger Stock-Price Increments 12 Years After Pennies
Traders Magazine Online News, February 5, 2013
Twelve years after the U.S. switched to 1-cent increments for stock trading to save investors money, regulators and broker-dealers are considering a test of larger tick sizes.
A pilot study of bigger quoting increments to improve liquidity in less-active stocks is being debated by executives from exchanges and brokers, market makers and academics at a Securities and Exchange Commission meeting Tuesday. The U.S. moved to minimum ticks of a penny from sixteenths of $1 in 2001. Panelists will also discuss the effect of 1-cent price moves on capital raising and trading.
Proponents say larger increments will spur market makers to supply more buying and selling volume, particularly for less- active stocks, while skeptics say it will cause people to pay more when they trade. An SEC advisory group last week recommended the creation of a stock exchange limited to small companies that have trouble raising capital in public markets as part of efforts to encourage more initial public offerings.
“A test would tell you if there’s a benefit or not,” Jim Maguire, 82, a former New York Stock Exchange specialist who began working at the Big Board in the 1970s and has opposed the move to 1-cent increments since 2000, said in a phone interview. “I assume there would be. The 1-cent spread has been a toxic element in trading.”
The shift to smaller increments enabled retail investors to buy shares at lower prices and sell for more. Combined with the growth of computing power and rules that boosted competition among venues, the process of decimalization decreased the profitability of equity dealers, who used money earned on wider bid-ask spreads to fund analyst research. Smaller tick sizes also complicated the way institutions trade by driving them to use more automated electronic strategies to handle blocks.
The Jumpstart Our Business Startups Act, signed into law by President Barack Obama last April, authorized the SEC to increase the tick size to as much as 10 cents from 1 cent for emerging-growth companies, or those with annual revenue of less than $1 billion. A July study by SEC staff members said that while rulemaking wasn’t immediately necessary, discussions with market participants could generate ideas for a pilot study.
Market makers and dealers need more economic incentives to bring smaller companies public, provide bids and offers and publish stock research, according to David Weild, New York-based chairman and chief executive officer of Weild & Co. and head of capital markets at Grant Thornton LLP. About 150 to 350 IPOs each raised less than $25 million a year from 1991 to 1997, according to data compiled by Grant Thornton. Fewer than 50 did so annually on average starting in 2000, the data show.
“The crisis in capital formation is a product of ill- advised market-structure changes that had massive consequences for small-cap stocks,” Weild, a former vice chairman at Nasdaq Stock Market, said in a phone interview. “The SEC needs to increase tick sizes and make them permanent to improve liquidity. It’s Armageddon for sub-$25 million IPOs.”
SEC rule changes focused on Nasdaq trading in the 1990s blunted companies’ interest in going public by hurting the dealers that facilitated their trading, while later one-size- fits-all marketplace rules ignored the needs of smaller companies, Weild said. The regulator should consider allowing all companies to decide what increment their shares use from 1 cent to 25 cents as a partial remedy, he said.
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