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Financials

UPDATE 1-U.S. SEC OKs 'tick size' pilot, to include 'trade-at' rule

(Updates with more details throughout)

WASHINGTON, May 6 (Reuters) - U.S. regulators approved a new study on Wednesday that calls for widening the increments, or “ticks,” at which smaller companies’ stocks are priced to see if this helps improve market liquidity.

The Securities and Exchange Commission said that the “tick size pilot” will commence on May 6, 2016, and will include batches of control and test groups of the stocks of companies with $3 billion or less in market capitalization.

One of the groups of stocks in the study will be subject to a controversial reform known as a “trade-at” rule, which could help drive more traffic onto stock exchanges and away from alternative trading venues like dark pools.

The New York Stock Exchange and Nasdaq OMX have long advocated for testing a trade-at rule, which would require brokerages to route trades to public exchanges, unless they can execute the trades at a meaningfully better price than what is available in the public market.

Such a rule would likely result in fewer orders being executed on dark pools and other platforms, which compete directly for order flow with the exchanges.

The genesis for the tick size pilot began in 2012, when Congress passed the Jumpstart Our Business Startups (JOBS) Act.

That law called on the SEC to consider conducting a study on whether widening ticks could help promote liquidity in thinly traded stocks.

Smaller companies’ stocks have had a hard time gaining traction in the markets for years.

They often receive little if any coverage by equity analysts, and many say the problems can be traced back to 2001 when the SEC introduced a practice known as decimalization.

Decimalization 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.

Under the study finalized Wednesday, some stocks will continue to be quoted at the current tick size of $0.01 per share while others will have their minimum increment widened to $0.05.

The SEC said it plans to release aggregated data from the study to the public during the study period, and that the exchanges and the Financial Industry Regulatory Authority will also study the impact of the changes on the market. (Editing by Eric Beech and Eric Walsh)

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