SEC panel advises against study to widen tick sizes for small firms

WASHINGTON Fri Jan 31, 2014 2:04pm EST

WASHINGTON Jan 31 (Reuters) - A regulatory advisory panel on Friday urged the U.S. Securities and Exchange Commission not to launch a test program that would allow the stocks of small-cap companies to trade in wider increments, a recommendation that clashes with a proposal from a different SEC committee.

The commission is still deciding whether to approve the launch of a pilot program to increase so-called "tick sizes," or the minimum pricing increments, in which the stock of small companies trade.

The recommendation by the Investor Advisory Committee clashes with a proposal floated last year by a business-friendly SEC advisory panel, which could make it harder for the SEC to decide whether to pursue a pilot program to change the tick sizes.

The practice known as decimalization, in which the SEC required all listed stocks to be traded and quoted in one-penny increments instead of in fractional increments such as one-sixteenth of a dollar, was introduced in 2001.

Critics, including stock exchanges and some policymakers, have said decimalization has harmed the liquidity of smaller companies because brokers have a harder time turning a profit, and have no incentive to make markets.

The 2012 Jumpstart Our Business Startups Act, which aims to help small businesses raise more capital, required the SEC to study whether it should conduct a pilot program to widen the tick size and see whether it improves market liquidity for small-cap stocks.

Stock exchanges like NYSE, a unit of IntercontinentalExchange Group and Nasdaq OMX, as well as some SEC commissioners like Republican Michael Piwowar, support proceeding with a study to see how wider tick sizes affects the markets.

Proponents have floated some ideas, such as increasing tick sizes from the current penny to a nickel, or even higher. Others have said perhaps companies should be able to select how their shares are priced.

"There is little downside risk to a pilot program," Piwowar said Friday. "If we start to see negative effects, including on retail investors, we can just end the pilot."

The SEC has not yet decided whether to proceed, or even how such a study would be structured.

Although there is no deadline, some in Congress have put pressure on the SEC to act by floating legislation that would mandate a study.

The pilot program proved to be a divisive issue within the Investor Advisory Committee, with members debating several competing options before voting to recommend against a study.

"The nature of this experiment is ... to say we are going to increase costs for investors and then see what happens," said Barbara Roper, a director of investor protection for the Consumer Federation of America, who sits on the panel.

The panel said it will remain open to reconsidering the issue later if presented with a detailed plan that addresses its concerns.

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