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The SEC's proposed tick-size pilot program targeting small-cap stocks should lead to improved access to capital for small companies, sources say, but whether that translates to higher returns for institutional small-cap investors is less clear.
The proposed one-year program, announced by the Securities and Exchange Commission and created by the Financial Industry Regulatory Authority and national securities exchanges like the New York Stock Exchange, awaits a decision by the full commission before implementing.
It would divide stocks of firms with market capitalizations of up to $5 billion into a control group that would trade small-cap shares at any price increment currently permitted and three test groups using 5-cent trading increments: one exclusively trading at 5 cents; one allowing some shares under certain order agreements to trade at any price increment currently permitted; and the third subject to a "trade-at" requirement that prevents price matching by a trading center that is not displaying the best bid or offer. No date has been set for an SEC vote on the proposal.
"For large investors dealing in blocks, in theory there'll be more liquidity in the market with a wider spread," said Brian Schwieger, head of equities, London Stock Exchange Group, London. "That would absolutely benefit the manager and asset owner. That's the theory."
"If you're widening the tick spread, you're trying to find the right balance between the cost of investing and making sure the liquidity providers are incentivized where needed," Mr. Schwieger said. "When spreads widen, there's typically larger trade sizes and larger volume per trade, but at the same time, there could be a reduction in the number of trades. It's easier to find blocks, which is great news for the larger investor. Wider spreads mean more stable prices."
The pilot program's focus on...