Beginning October 3, 2016, a new National Market System (NMS) Plan to implement a Tick Size Pilot Program (the “pilot”) will widen the minimum quoting and trading increment —sometimes called the “tick size” — for some small capitalization stocks. The goal of the pilot is to study the effect of tick size on liquidity and trading of small capitalization stocks.
The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy (OIEA) are issuing this investor alert to explain the pilot and how it might affect certain orders you place with your full-service or online brokerage firm. We also provide some background on the pilot and why it is being implemented.
What Will Change?
Under the pilot, the tick size will be widened from a penny ($0.01) to a nickel ($0.05) for specified securities listed on national securities exchanges (“pilot securities”). For some pilot securities, only quoting will need to occur in $0.05 increments, while for others, both quoting and trading generally will need to occur in increments of a nickel.
Which Securities Does the Tick Size Pilot Program Impact?
The pilot will include a specified subset of the exchange-listed stocks of companies that have $3 billion or less in market capitalization, an average daily trading volume of one million shares or less and a volume-weighted average price of at least $2.00 for every trading day. There will be a control group of approximately 1,400 securities and three test groups, each with approximately 400 securities selected by a stratified sampling. The groups are defined as follows:
- The control group will quote and trade at their current tick size increment of a penny.
- The pilot securities assigned to the first test group generally will be quoted in $0.05 increments, but will continue to trade at their current price increment of $0.01, subject to limited exceptions.
- The pilot securities assigned to the second test group generally will be quoted in $0.05 increments, subject to limited exceptions. In addition, these securities also must trade in $0.05 minimum increments, subject to exceptions, including for executions at the midpoint of the national best bid and offer (NBBO), certain retail investor executions and negotiated trades.
- The pilot securities assigned to the third test group will adhere to both the quoting and trading requirements of the second test group, but will also be subject to a “trade-at” requirement, which generally prevents price matching by trading centers that are not already displaying a quotation at that price, unless an exception applies, including for example, an exception for block size orders and exceptions that mirror those under Rule 611 of Regulation NMS.
How Long Will This Last?
The pilot will run for a two-year period that will commence on October 3, 2016.
What Do Regulators Expect to Learn from the Tick Size Pilot Program?
The data collected from the pilot will be used by the SEC, national securities exchanges and FINRA to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors—such as less volatility and increased liquidity.
Data generated during the pilot will be publicly available on the exchanges’ and FINRA’s websites to assist in analyzing the impact of wider tick sizes on smaller capitalization company securities.
What Else Do I Need to Know?
Beginning on October 3, 2016, your brokerage firm will be required to ensure that your existing unexecuted priced orders in pilot securities comply with the new nickel increment requirements of the pilot. This means that your broker should either re-price your order in these pilot securities to a nickel increment, or reject the order as being priced in an impermissible increment. Likewise, any new orders you place in a pilot security after October 3rd must be priced in a nickel increment. This means the “limit” or “stop” prices that you may place on your order can no longer be in pennies and instead must be in increments of $0.05. Remember, this is only true for the specific securities that are subject to the pilot and are in one of the three test groups.
Contact your investment professional to determine whether any of your existing open orders, or a new order you are placing, will be impacted by the pilot, and to find out more information about how the firm is handling orders in pilot securities.
Where Can I Find Information on Tick Size Pilot Program Securities?
All exchanges that are participants in the pilot will maintain a list of pilot securities on their websites. For example, a list of pilot securities is available on NYSE’s website here, and on Nasdaq’s website here. FINRA also will maintain a list of pilot securities on FINRA’s Tick Size Pilot Program Implementation page.
For more information on the pilot, visit FINRA’s page dedicated to the Tick Size Pilot Program. If you have a question for FINRA, Tick Size Pilot Program questions can be sent via email, or by calling 800-321-6273.
Why Is This Happening?
In 2012, the Jumpstart Our Business Startups Act (“JOBS Act”)—an Act to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies—directed the SEC to conduct a study and report to Congress on how decimalization affected the number of initial public offerings (“IPOs”), and the liquidity and trading of securities of smaller capitalization companies. The JOBS Act also provided that the SEC could, by rule, designate a minimum increment for the securities of emerging growth companies that is greater than $0.01 but less than $0.10 for use in all quoting and trading of securities in any exchange or other execution venue, if the SEC determined to do so.
To assist in evaluating the impact of widening the tick size on the securities of smaller capitalization companies, in June 2014, the SEC directed FINRA and the national securities exchanges to act jointly in developing and filing a plan to implement a pilot program that, among other things, would widen the quoting and trading increment for certain small capitalization stocks. In a press release, the SEC said that it will use the pilot program to assess whether these changes would enhance market quality to the benefit of U.S. investors, issuers and other market participants. To comply with the SEC’s direction, on August 25, 2014, FINRA and the national securities exchanges proposed, and on May 6, 2015, the SEC approved, the pilot.
- FINRA: Tick Size Pilot Program.
- FINRA: Tick Size Pilot Program Implementation Plan
- FINRA: Tick Size Program Trading and Quoting FAQ’s
- FINRA: Sign up for Tick Size Pilot Notifications
- SEC: Order Approving Tick Size Pilot Program Plan
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.