By Sarah N. Lynch
WASHINGTON Feb 5 Stock exchanges and financial
industry executives on Tuesday urged U.S. securities regulators
to back a program to test a change in the way shares are priced,
in a bid to generate more investor interest in small and
Representatives from NYSE Euronext, Nasdaq OMX
, BATS Global Markets, TD Ameritrade, Fidelity
and Invesco gathered for a roundtable at the Securities and
Exchange Commission to discuss tick sizes, or the minimum
pricing increment that can be used to trade securities, and
whether any changes should be made.
"I know that many feel today's market structure, including
the current tick size regime, does not recognize the particular
needs of smaller companies and that a detailed examination of
the current structure is important and appropriate," SEC
Chairman Elisse Walter told the audience on Tuesday.
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.
That change was prompted by concerns that the use of
fractions was leading to excessive profits for market-makers.
Since then, however, some critics have complained that such
small increments have reduced trading margins to the detriment
of smaller companies.
Proponents of change want a more tailored system which
allows tick sizes of more than a penny for small and mid-cap
stocks rather than a uniform size across the board.
Because of the lack of liquidity in the stocks, the shares
have failed to attract sufficient interest from large
institutional investors, these people say.
"The investor should start seeing more liquidity offered by
our markets at levels in which they want to transact," said R.
Cromwell Coulson, the chief executive of OTC Markets Group
, which runs an alternative trading system.
"We run an e-bay of markets, and right now, the shop keeper
shelves are too thin for investors. We need to do some
experiments to try to improve that."
In addition, critics argue that penny increments reduced
trading commissions and made it less attractive for research
analysts to cover certain smaller companies. Market interest in
those companies can shrink with less available research.
Chris Isaacson, the chief operating officer of the
third-largest exchange BATS Global Markets, said he would like
to see a year-long pilot program.
Under BATS' proposal, he said, there would be a five-cent
minimum tick size and a one-cent minimum trading increment
where, either the average daily volume in a security is less
than 100,000 shares or the security is priced greater than $100
He added that he also believes in some instances, the tick
size should be lowered for highly liquid stocks, and he proposed
a half-cent minimum tick size to apply in certain cases.
"The one-size-fits-all approach to tick size may have had
unintended consequences of impeding the capital-raising
abilities of small and mid-cap companies," he said.
JOBS ACT PROMPTS NEW LOOK
Congress already took some steps last year to help small
businesses raise capital and go public when it passed the
Jumpstart Our Business Startups (JOBS) Act.
The law did not mandate an increase in the tick size,
though it required the SEC to study the issue.
That study, which was released in July, recommended against
proceeding with any specific rulemaking to increase tick sizes.
It did call for having a roundtable to generate ideas about how
a potential pilot study could work.
So far, there seems to be a consensus about the desire to
explore some sort of change to the tick size structure.
Last week, the SEC's Advisory Committee on Small and
Emerging Companies, an expert panel offering policy advice,
voted to urge the SEC to increase the tick size for small
companies and let those companies select their own tick size
within a designated range.
However, not everyone at Tuesday's roundtable felt
decimalization is to blame for a lack of investor interest and
less research in the small-cap market.
Brian Conroy, president at Fidelity Capital Markets, said
his company has "not seen the evidence that would indicate it
has any effect on the IPO process itself."
He added that firms can increase commission fees today if
they wish to help subsidize their analyst coverage for small-cap
companies, rather than using an increase in the tick size to
help bolster research funding.
"Why isn't that taking place?" he asked. "Why are we talking
about a pilot program to artificially increase the tick size?"
SEC Republican Commissioner Daniel Gallagher told reporters
on the sidelines of Tuesday's event that he has an open mind
about the push by some to launch a pilot, but said it is not
going to be "a slam dunk decision" by the SEC.