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SEC Releases Tick Size Pilot Proposal

The SEC announced a proposal to implement a 12-month long pilot program that would set the minimum tick size at $0.05 for a test group of securities. In June, the SEC requested that FINRA and the securities exchanges develop the plan, in order to determine if such a change would increase market quality.

Pilot securities will be selected based on a three-month measurement period and will consist of those with a closing price of greater than $2 per share initially and greater than $1.50 thereafter, a volume-weighted average price of greater than $2, less than one million shares in average daily volume, and a market capitalization of less than $5 billion. The test would split eligible securities into one control group and three test groups, each of which would impose the $0.05 tick size requirement, but add a slight variation. In the first test group, trades could occur at any increment that is currently permitted today. Securities in the second group could only trade in $0.05 increments, with certain exceptions for midpoint trades and retail order price improvement, among others.

The last group would impose the same parameters as the first, but also be subject to a “trade-at” requirement. This would prevents venues that were not displaying a quote from executing a trade at the protected best bid or offer, and would also prevent a venue from executing a volume greater than the displayed size at the best bid or offer.  

The Commission will seek public comment over a 21-day period, and the Wall Street Journal reports that the program will likely go into effect in late 2014 or early 2015. The release can be read here, and the proposal can be read here.

The Forum will co-host, with the University of Maryland, a program on November 20, 2014, focusing on board oversight of best execution in today’s complex markets.  Additional information on the program can be found here.