February 08, 2013

The Securities and Exchange Commission held a roundtable discussion on decimalization on February 5, where a group of panelists debated the impact of tick sizes on small and mid-sized companies.

While the SEC approved penny stock prices about a dozen years ago, which led to tighter bid-asked spreads and lower trading costs for investors, some market participants feel that one-cent price increments have hurt the liquidity in small cap stocks. Some say that this has hurt the capital formation process as fewer IPOs are being brought to exchanges. Market participants who came from exchanges, banks, trading firms and mutual funds, urged the SEC to adopt a pilot program to study trading in larger increments, in say nickels and dimes. But it’s unclear how the pilot program will be structured, for how long and how many stocks it will cover.

The SEC began looking at tick-size about a year ago, after President Obama signed the Jumpstart Our Business Act into law last April. The JOBS Act authorized the SEC to raise the increment for emerging market companies up to 10 cents from one cent for companies with $1 billion in market capitalization, reported Bloomberg News.

The panelists discussed the economic consequences of increasing or decreasing minimum tick sizes. A supporter suggested that wider spreads would give market makers and dealers more incentive to take companies public and to add liquidity and produce stock research. On the other hand, one brokerage head pointed out the negatives of raising the costs of trading for retail or institutional investors. Also, the main market makers today are high frequency trading firms which tend not to be involved in IPOs or writing equity research reports.

[The SEC Decimalization Roundtable: The Industry Responds on Twitter ]

A few cautioned that decimalization is one piece of a series of flawed market structure initiatives that may have damaged liquidity in smaller companies. Still it seemed, the next steps would be for the SEC to consult with industry participants on hammering out the details of pilot program. One fund manager told Bloomberg that it should last for 12 to 24 months to gauge whether larger tick sizes "boost market making in less-active shares and prompt brokers to write more research about those stocks."

All in all, the topic prompted some responses from industry leaders -- including Advanced Trading's own Thought Leaders Justin Schack, Chris Nagy, and Joe Saluzzi -- who took to Twitter to share their thoughts on penny pricing.

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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...