The folowing is an edited version of the Security Traders Association’s comment letter to the SEC on its Tick Size Pilot Program. The entire letter can be found on the STA website.
Dear Mr. Fields,
The Security Traders Association offers comment on the national market system plan to implement a targeted 12-month pilot program that will widen minimum quoting and trading increments for certain stocks with smaller capitalization. This Plan was filed on November 3, 2014 in response to the June 24, 2014 Securities and Exchange Commission order directing the Exchanges and the Financial Industry Regulatory Authority to submit a tick size pilot plan. Data gathered from the Plan will enable the Commission to study the impact of wider quoting and trading increments on the trading of certain small capitalization stocks.
The STAs unique and focused comments on issues related to market structure come from our roles as practitioners in the markets. STA membership does not represent any specific business model, but rather encompasses a broad range of industry participants. It is from this broad based membership that STA seeks to build bottom-up consensus regarding issues that relate directly to the U.S. securities markets.
STA is revising our recommendation that in addition to an MPV of $0.05 for quoting, companies in the pilot be allowed to trade in $0.005 increments. STA believes that one pilot test group strikes a proper balance between complexity and costs, with an efficient design that yields robust data.
Recommendations Regarding the Plan
STA recommends that the Commission implement a pilot plan which would provide empirical data on the effects decimalization with no minimum price variations has had on the overall liquidity available to investors in companies with small capitalizations. STA understands the complexities of designing, implementing and studying such a plan. Therefore we offer both guiding principles and detailed recommendations in this letter.
Guiding Principles
– The Plan should balance costs and benefits in its design with creating the conditions which allow the variables to be tested efficiently.
– There should be one clearly defined primary goal for the plan. All other goals should be prioritized accordingly or omitted if they pose a conflict or risk to achieving the primary goal.
– Securities with reasonable or ample liquidity which are trading efficiently in todays market structure should not be included in the Plans Selection group.
– Terms and conditions of the Plan should apply to all market participants. Highly efficient markets allow investors of all types and their agents to interact with each other.
– The Plan needs to allow for two features, which all investors find meaningful when investing in companies, regardless of their capitalization: opportunity for price improvement and mid-point trading.
– Data which does not contribute towards measuring improvements or degradations of the primary goal should not be mandated.
– Insight into the Commissions response from specific results should be provided in the Plans final design. Providing such information will enable Participants to understand what Commission defines as a positive or negative result in the data.
Detailed Recommendations
Primary goal should be improving overall liquidity available to investors.
STA continues to believe the primary goal of the Plan should be collecting data which measures overall liquidity, both natural and enhanced, available to investors in small capitalization stocks.
Natural liquidity, simply defined, is liquidity provided by investors and traded through publicly lit and privately unlit markets. Enhanced liquidity is liquidity that exceeds what is publicly and privately available in the market place. Enhanced liquidity could be the result of certain behavior by a sub-category of trading centers that commit capital and conduct secondary offerings or institutional block trades.
It is reasonable for the Plan to gather data for more than one purpose or goal. However, secondary goals should be clearly defined and prioritized. Doing so will ensure variables which may achieve data for secondary goals, but conflict with the primary goal are not implemented into the final design.
Data used for measuring improvements and degradations.
There are some widely used market quantitative measures that when used in conjunction would be effective in measuring improvements and degradations in overall liquidity available to investors:
Publicly available float. Strong correlations exist between a companys publicly available float and the amount of liquidity available to investors. Companies with large publicly available floats tend to be more liquid. We recommend that changes in the amounts of publicly available floats as measured by shares be measured in the Pilot.
Share turnover versus float ratio. Such a measure of stock liquidity is calculated by dividing the total number of shares traded over a period of time by the average number of shares outstanding (publicly available float) for the period. The ratio helps put a companys share volume in perspective as it relates to the companys available float.
Quoted and effective spreads.
Overall Trading volume; both share and dollar.
Aggregate displayed depth of the limit order book.
Volatility. Providers of enhanced liquidity are more inclined to commit capital and more able to conduct block trading if the prices of the security the provider transacts in remains stable.
STA believes gathering data in these categories would provide the Commission robust data for measuring improvements and degradations in overall liquidity available. It is important to note that none of these measurements should be used alone to draw conclusions.
The above six (6) categories of data can be obtained by the Commission via its Market Information Data and Analytics System, MIDAS. Requesting Participants in the Plan to provide this data would be duplicative and unnecessarily increase the costs of the Pilot.
Implementation
The Plan should be implemented on a one-year pilot basis. It should be applicable during and outside of regular trading hours.
The Commission should assess data and make public its findings from the first six months of the Pilot at a reasonable time thereafter.
Conclusion
The STA appreciates the opportunity to comment on the Plan. We also wish to acknowledge and thank the Commission and all the staff responsible for designing the requirements for which the Plan seeks to address.
John Daley
Chairman of the Board
Jim Toes
President and CEO
