This is an interesting story because what the SEC decides to do will have implications on not only trading costs for individuals and institutions but also profitability of Wall Street brokers.
The Securities and Exchange Commission said late Monday it was releasing for public comment a highly-anticipated plan to determine whether trading the stocks of smaller companies in wider “tick sizes,” or the difference between what traders bid and offer for the shares, would boost interest in the stocks.
The 45-day comment period is a crucial step needed to get the test program off the ground and comes more than two months after U.S. stock exchanges and the Financial Industry Regulatory Authority, a Wall Street self-regulator, submitted the plan to the SEC.
The program is one of the first major stock-market initiatives launched by SEC Chairman Mary Jo White . It comes amid mounting concerns about the impact of computer-driven trading in the stock market.
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.
That's a full circle from January 29 2001 when the New York Stock Exchange made history by converting all of its stocks to decimal pricing ending two centuries of pricing in fractions.
The decimalization of stock trading was supposed to have democratized the Wall Street and become the permanent way of doing business, but it did not. Apparently there were flaws and unintended consequences.
(1) A paper released by Grant Thorton in 2009, Market Structure is Causing IPO Crisis, blamed the decimalization for taking away all the economic incentives for trading and researching on small cap companies thus hurting the IPO market. Basically, they were saying the brokers need to be bribed, through wider bid-ask spread, to create market for small, under-followed companies.
(2) People argued that it encouraged HFT (high frequency trading) given the low cost of each trade. By 2010, it was estimated that HFT accounted for more than 70% of equity trades taking place in the US.
The SEC came up with its own study in July 2012. While it did not address the HFT issue, it concluded that "there is less available information related to how lower spreads may have negatively impacted capital formation, especially with respect to the complex, competitive dynamics and economic incentives of market intermediaries who provide liquidity."
Guess everything changed when Mary Jo White became the SEC Chairperson in April 2013. On June 24, 2013, the SEC unveiled a one-year "tick size" pilot program to let some stocks trade in five-cent increments instead of one-penny increments and the rest is history.
It will be interesting to see how all this moves forward.
