Explaining the dangers of penny pricing and the benefits of minimum price variations (MPVs) are keys to better market structure, says the incoming Security Traders Association chairman.
Tom Carter, longtime sales trader with JonesTrading, recently told Traders Magazine that penny pricing along with other reforms are hurting markets for a number of reasons.
Decimals and technology have contributed to a quick trading environment, Carter says. And that, he adds, has investors trading on a more active basis across all securities. In STA’s opinion, Carter adds, this "has played a detrimental role in the capital formation picture." Penny pricing, he says, is also discouraging patient, long term "buy and hold investors."
The Securities and Exchange Commission completed a study in July on decimal pricing’s impact on small-cap stocks. Congress called for the study in the JOBS Act passed earlier this year. The findings were inconclusive whether decimalization hurt liquidity and the provision of research for small cap stocks. The SEC said it has no plans to increase tick sizes right now, but it is still studying the issue and could do something down the road. And that’s encouraging to the STA.
Why would MPVs correct the problem?
"We continue to believe that MPVs greater than one penny help the strength of secondary trading in emerging growth companies, which in turn plays a positive role in their ability to raise capital," the STA wrote in a recent comment letter to regulators.
STA traces many market structure problems to the introduction of decimals in 2001 without MPVs, according to Carter.
So what is to be done?
Carter wants the SEC to initiate a pilot program to study the impact on the overall liquidity available in securities when quoting in MPVs greater than .01 cent.
The benefits of MPVs could be numerous. They would likely produce more IPOs, better market making and stronger secondary markets, Carter says. STA, noting that many investors are putting less into equities and more into bonds, also contends that MPVs would increase investor confidence.
The quality of markets, the STA wrote in its comment letter, would be "exemplified by increased depth and liquidity leading to execution of trades in size without increased volatility."
This will mean more investors buying into small and new companies that "have the potential to earn liquidity premiums greater than larger companies," according to the STA comment letter.
All of this, Carter believes, would allow more market makers to re-enter markets. "And that," he maintains, "would add to the depth of book and further reduce volatility."
Why?
Carter and the STA believe it could slow down some of the faster trading environment. This, Carter contends, might allow for a little more human intervention.
The trading industry veteran also hopes his intervention could lead to a greater consensus in the sometimes contentious trading industry.
A longtime member of the STA’s Los Angeles chapter, Carter says the industry can come together when issues are properly framed. An example was how he and other traders on the West Coast in 2005 were able to convince the rest of the industry that the early Big Board openings would have been bad for everyone.
"And some people were saying that it was just a West Coast issue," said Carter then head of the STA’s LA chapter.
"And I said no," he explains. "I think it really is a national market structure issue, because IPOs and all sorts of dissemination of information issues were all dependent on the open."
Carter and his allies were triumphant on the early opening issue. And now he hopes, in his year as head of the STA, to achieve similar success on the MPV/penny pricing issue.
