SEC’s Tick-Size Pilot

The SEC approved the Tick Size Pilot (the “Pilot”) program on May, 6, 2015. The Pilot is scheduled to be implemented by October 3, 2016 with data collection to begin on April 3, 2016.

The Pilot is a two-year program that would widen the minimum quoting and trading increments–or tick sizes–for stocks of some smaller companies.  The SEC plans to use the pilot program to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors.  It 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 $2.00 for every trading day.

The Pilot will consist of a control group of approximately 1400 securities and three test groups with 400 securities in each selected by a stratified sampling.  During the pilot:

Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share and will trade at the currently permitted increments.

Pilot securities in the first test group will be quoted in $0.05 minimum increments but will continue to trade at any price increment that is currently permitted.

Pilot securities in the second test group will be quoted in $0.05 minimum increments and will trade at $0.05 minimum increments subject to a midpoint exception, a retail investor exception, and a negotiated trade exception.

Pilot securities in the third test group will be subject to the same terms as the second test group and also will be subject to the “trade-at” requirement to prevent price matching by a person not displaying at a price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies. In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions that mirror those under Rule 611 of Regulation NMS will apply.

The Pilot will require trading centers (market makers and internalizers) to update their internal order management systems and trading systems to accommodate additional order types and to ensure quoting and trading in accordance with the Pilot.  In addition, there are extensive data collection requirements that each trading center must satisfy in order to comply with the Pilot.  FINRA has recently published an updated OATS specification allowing for additional fields in OATS which FINRA will utilize to satisfy the data collection requirements of the Pilot on behalf of the trading centers.

Jordan & Jordan is actively involved with industry organizations and has been monitoring the development of the relevant FAQs with respect to the Pilot.  In addition, we have specific experience with system changes related to regulations including the Market Access Rule, Regulation NMS and OATS.  We can assist your firm with the review and changes to your current systems as well as updates to your OATS reporting to facilitate data collection under the Pilot.