SEC Plans ‘Tick’ Size Pilot Program; Advocates Say Aim Is to Make it Easier to Trade Shares of Smaller Companies

SEC Plans ‘Tick’ Size Pilot Program

Advocates Say Aim Is to Make it Easier to Trade Shares of Smaller Companies

TELIS DEMOS And SCOTT PATTERSON

Updated Feb. 21, 2014 6:54 p.m. ET

WASHINGTON—Securities and Exchange Commission Chairman Mary Jo White said the agency plans to implement a test program to trade stocks in wider increments, like nickels, to determine whether such a change would make it easier for investors to trade some shares.

The move comes just weeks after the SEC’s investor advisory committee recommended against implementation of such a program over concerns it could increase the cost of trading.

In a speech in Washington on Friday, Ms. White said she plans to push forward a pilot program that “would widen the quoting and trading increments and test, among other things, whether a change like this improves liquidity and market quality.”

Phasing out trading in penny increments has long been championed by some lawmakers, smaller investment banks and stock exchanges, who say trading in wider bands would make it easier and more profitable to trade shares of smaller companies, as well as lessen volatility. The SEC’s pilot program would move the trading of some stocks to bigger “tick” sizes, or the difference between what traders bid and offer for the shares, after more than a decade of trading in penny increments.

Critics, including consumer watchdogs, are worried about increasing the cost of trading by forcing traders to potentially pay more, or sell for less, than they would under penny trading. Some also doubt the measure would improve capital raising for smaller companies.

U.S. exchanges and regulators are embroiled in an industrywide debate about how such a pilot program would work. The plan has backing on Wall Street, including stock-exchange operators such as Nasdaq OMX Group Inc., though some bigger banks and retail brokerages, who often trade in increments smaller than pennies in private venues known as “dark pools,” have asked for any test to be limited in scope. SEC officials have been working with exchanges on the development of the plan.

The details are still under consideration, according to people familiar with the discussions. The SEC has asked the stock exchanges—including NYSE Euronext, Nasdaq, BATS Global Markets Inc. and Direct Edge Holdings LLC—to work together to hammer out rules, the people said. The SEC would review, and possibly vote on, the rules before they are implemented.

Ms. White’s comments did touch one part of the debate. By referring to both “quoting and trading,” she suggested that the SEC didn’t want to see private venues executing trades in smaller increments than exchanges are required to list prices. Some big banks and retail brokerages have expressed concern that cutting out those venues would harm investors.

This month, Congress passed a bill that would force the SEC to create an optional five-cent or 10-cent increment for companies whose market capitalization is under $750 million, an experiment that would last for five years. The fate of the measure is unclear because the Senate hasn’t proposed a companion bill.

Some corners of the financial industry have been lobbying for a pilot program to test wider pricing increments. Last November, a group, which includes investment bankers, mutual funds, venture capitalists and exchanges, outlined their plan. Unlike Congress, the group proposed a program that would be mandatory for companies with a market capitalization below $750 million.

The proposal would also require companies in the pilot program to use five-cent increments.

The reason for the more limited options, they said, was to ensure there is a good way to measure how effective the program is in bringing more small companies to market for initial or secondary public stock offerings.

“The weight of the evidence is that decimalization has not had a significant impact on IPO activity,” wrote Joseph Grundfest, a former SEC commissioner and now a professor at Stanford Law School, in a statement to the SEC’s advisory committee. But, he said, “Experimentation can and should play a more significant role in the rulemaking process.”