The Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies advised the regulator to adopt a rule that would increase the minimum trading increment for small companies. Issuers would be allowed to determine the size of the increment for trading in their shares.
The committee told the SEC in a letter posted to its website that providing economic incentives to broker-dealers would increase liquidity in the stocks of small- and mid-cap companies. The letter, dated March 21, said this in turn would lead to more initial public offerings of stock.
The group’s recommendation comes as the SEC, under instructions from Congress and last year’s JOBS Act, considers whether to increase ticks for companies with revenues of less than $1 billion.
The Jumpstart Our Business Startups (JOBS) Act, signed into law by President Barack Obama a year ago, authorized the SEC to increase the tick size to as much as 10 cents for emerging growth companies, from the current 1 cent increment that applies to all stocks.
The controversial idea stems from concerns in Washington that the current tick regime is partly to blame for a dearth of initial public offerings. Small firm backers favor the idea, figuring larger tick sizes would provide enough profit to engender research that would promote additional interest in small stocks.
Small-firm backers say that could jumpstart the stagnant IPO market, while some traders oppose the idea as it would increase their costs.
The Advisory Committee was organized in September 2011 with the goal of advising the SEC about the needs and issues of privately held small businesses and publicly traded companies with less than $250 million in public market capitalization.
Among the group’s 18 members are three from the securities industry: John Borer, a senior managing director and head of investment banking at The Benchmark Company; Dan Chace, a portfolio manager at Wasatch Advisors; and Tim Walsh, chief investment officer for the State of New Jersey pension fund.
In the letter, the group argues that economic incentives are necessary to encourage market making and the provision of research on small companies. That entails that the SEC change its methodology for determining ticks sizes. The group wants the SEC to allow small companies to determine their own tick sizes.
The SEC appears to be in favor of running a pilot program that would increase ticks for smaller companies. In an interview with Bloomberg last week, John Ramsay, the SEC’s acting director of trading and markets, said a pilot “makes sense.”
