“The data generated by this important market structure initiative will deepen our understanding of the impact of tick sizes on market quality and help us consider new policy initiatives that can improve trading in the securities of smaller-cap issuers,” SEC Chair Mary Jo White said in a press release announcing the pilot.
The pilot is based off a proposal by the national securities exchanges and the Financial Industry Regulatory Authority, but the SEC modified several provisions to take into account input from commenters.
Among other things, the agency extended the pilot to two years rather than one and reduced the size of block transactions eligible for the exception to better reflect trading in smaller-cap stocks.
The SEC also modified the market capitalization threshold for securities included in the tick-size pilot and revised certain data elements concerning market-maker profitability to make data collection less burdensome and assure the protection of confidential business information.
The tick-size pilot will begin by May 6, 2016, and will include stocks of companies with $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 for every trading day.
The pilot will consist of a control group of about 1,400 securities and three test groups with 400 securities in each. The control group securities will trade in the current increment of $0.01 per share, but the test group securities will trade in increments of $0.05 per share under certain conditions.
The exchanges and FINRA will submit their initial assessments on the tick-size pilot’s impact 18 months after the pilot begins, based on data generated during the first 12 months of its operation.