The SEC’s tick pilot program will do more harm than good, according to Dave Cummings, CEO and Chairman of Tradebot Systems and founder and former CEO of BATS Trading, the second-largest exchange in the US by volume. The tick size pilot would increase minimum spreads in a set of pre-defined pilot securities.
Cummings says that the underlying premise of the pilot was that wider spreads would allow market-makers to make a greater profit on small-cap stocks, which they could then spend on issuer research and underwriting. He finds that premise “ridiculous” because the groups doing the trading do not participate in other functions. He argues that the wider spreads will impose greater costs on retail customers and that the program will add complexity to an already complex market system. Given the small size of the pilot, he also believes that brokers will be unlikely to undergo the cost and effort required to optimize trading under the pilot rules. These issues will give investors a “strong structural reason” to avoid the pilot stocks, according to Cummings.
Cummings also takes aim at the “trade-at” portion of the pilot program, in which displayed liquidity across markets is given execution preference over non-displayed orders. He notes that institutions use non-displayed orders and dark pools to efficiently execute large transactions, and thus will be hurt by the requirement.
His solution? Alter exchange fee structures to incentivize resting limit orders. The full post can be found here.