The Securities and Exchange Commission has issued an order directing certain national securities exchanges and the Financial Industry Regulatory Authority, Inc. to jointly develop and file with the SEC a national market system plan to implement a 12-month pilot program aimed at widening minimum quoting and trading increments (i.e., tick sizes) for certain small capitalization stocks. More specifically, the pilot program will target stocks with a market capitalization of $5 billion or less, an average daily trading volume of one million shares or less and a share price of $2 per share or more. The program will consist of a control group and three test groups, each comprised of 300 securities. Securities in the control group are tested at the current tick size increment of $0.01 per share and trade only at increments currently permitted. Securities in the first two test groups will be quoted in $0.05 minimum increments; however, the increments in which the applicable securities trade will vary. The third test group will, among other things, be subject to a “trade-at” requirement, which is aimed at preventing price matching by a trading center that does not display the best bid or offer. Notably, the SEC is using the third test group’s trade-at requirement to determine if quoting and trading at wider increments in the absence of a trade-at requirement will cause trading volume to migrate to “dark venues,” or venues that do not provide public pre-trade price transparency. 

The SEC’s order requires that all data collected be transmitted to the SEC and made available to the public. A plan detailing the pilot program is due to the SEC by August 25, at which time the SEC will publish the plan for public comment and determine whether to approve it. 

The SEC Order (Release No. 34-72460) can be found here.