Industry debates test program for small-cap stock pricing

Stock exchanges and financial industry executives on Tuesday urged U.S. securities regulators to back a program to test a change in the way shares are priced, in a bid to generate more investor interest in small and mid-sized companies.

Representatives from NYSE Euronext, Nasdaq OMX, BATS Global Markets, TD Ameritrade, Fidelity and Invesco gathered for a roundtable at the Securities and Exchange Commission to discuss tick sizes, or the minimum pricing increment that can be used to trade securities, and whether any changes should be made.

"I know that many feel today's market structure, including the current tick size regime, does not recognize the particular needs of smaller companies and that a detailed examination of the current structure is important and appropriate," SEC Chairman Elisse Walter told the audience on Tuesday.

The practice known as "decimalization," in which the SEC required all listed stocks to be traded and quoted in one-penny increments instead of in fractional increments such as one-sixteenth of a dollar, was introduced in 2001.

That change was prompted by concerns that the use of fractions was leading to excessive profits for market-makers.

Since then, however, some critics have complained that such small increments have reduced trading margins to the detriment of smaller companies.

Proponents of change want a more tailored system which allows tick sizes of more than a penny for small and mid-cap stocks rather than a uniform size across the board.

Because of the lack of liquidity in the stocks, the shares have failed to attract sufficient interest from large institutional investors, these people say.

"The investor should start seeing more liquidity offered by our markets at levels in which they want to transact," said R. Cromwell Coulson, the chief executive of OTC Markets Group, which runs an alternative trading system.

"We run an e-bay of markets, and right now, the shop keeper shelves are too thin for investors. We need to do some experiments to try to improve that."

In addition, critics argue that penny increments reduced trading commissions and made it less attractive for research analysts to cover certain smaller companies. Market interest in those companies can shrink with less available research.

Chris Isaacson, the chief operating officer of the third-largest exchange BATS Global Markets, said he would like to see a year-long pilot program.

Under BATS' proposal, he said, there would be a five-cent minimum tick size and a one-cent minimum trading increment where, either the average daily volume in a security is less than 100,000 shares or the security is priced greater than $100 per share.

He added that he also believes in some instances, the tick size should be lowered for highly liquid stocks, and he proposed a half-cent minimum tick size to apply in certain cases.

"The one-size-fits-all approach to tick size may have had unintended consequences of impeding the capital-raising abilities of small and mid-cap companies," he said.


Congress already took some steps last year to help small businesses raise capital and go public when it passed the Jumpstart Our Business Startups (JOBS) Act.

The law did not mandate an increase in the tick size, though it required the SEC to study the issue.

That study, which was released in July, recommended against proceeding with any specific rulemaking to increase tick sizes. It did call for having a roundtable to generate ideas about how a potential pilot study could work.

So far, there seems to be a consensus about the desire to explore some sort of change to the tick size structure.

Last week, the SEC's Advisory Committee on Small and Emerging Companies, an expert panel offering policy advice, voted to urge the SEC to increase the tick size for small companies and let those companies select their own tick size within a designated range.

However, not everyone at Tuesday's roundtable felt decimalization is to blame for a lack of investor interest and less research in the small-cap market.

Brian Conroy, president at Fidelity Capital Markets, said his company has "not seen the evidence that would indicate it has any effect on the IPO process itself."

He added that firms can increase commission fees today if they wish to help subsidize their analyst coverage for small-cap companies, rather than using an increase in the tick size to help bolster research funding.

"Why isn't that taking place?" he asked. "Why are we talking about a pilot program to artificially increase the tick size?"

SEC Republican Commissioner Daniel Gallagher told reporters on the sidelines of Tuesday's event that he has an open mind about the push by some to launch a pilot, but said it is not going to be "a slam dunk decision" by the SEC.

(Reporting By Sarah N. Lynch; Editing by Karey Wutkowski, Leslie Adler and Andrew Hay)