SEC Tick Pilot May Deliver an October Surprise

28 September 2016

By John Vogt



On October 3, 2016, the SEC?s Tick Pilot to increase liquidity for small cap companies comes into play. With the overarching objective to evaluate whether or not widening the tick size for securities of smaller capitalization companies would impact trading, liquidity, and market quality of those securities, 1,200 companies will see their stocks quoted in minimum five cent increments. The stocks of some of these companies will continue to trade under current pricing requirements, while others will see changes in the prices at which many orders will be executed, and potentially more volume on their listed exchanges and less in dark pools.

How the Tick pilot works.

The tick pilot will be applied to a test group of companies under $3B in market cap and a stock price greater than $2.00. Companies will be divided into three test groups of 400 companies each, while roughly 1,400 other companies will comprise a control group.

Test groups will be phased in between October 3 and October 31. Each of these companies will see their stocks quoted in minimum $.05 increments.


The test groups:

  • The first test group will see their stocks quoted in .$05 increments, but they may trade at any price increment currently permitted.
  • The second test group will also be quoted and traded in minimum $.05 increments (the spread) but would allow certain exemptions for midpoint executions, retail investor executions, and negotiated trades.
  • The third test group includes the most controversial components. Stocks in Trade Group 3 will be quoted and traded as those in Group 2, although block trade orders (5,000 shares or more) will also be exempt from the $.05 minimum increment. Stocks are subject to a ?trade-at? rule. The trade-at rule will direct volume to the ?lit? venues ? NASDAQ and NYSE ? to fill displayed orders.

A link to the companies in the test program, along with the test or control group to which they are assigned, can be found here.

Helpful tips for IROs.

IROs have an important task ahead of them. They are responsible for educating management, boards and retail investors of the changes, which requires internal and external communication, along with short- and long-term monitoring of stock trading.

How can IROs stay on top of these changes and ensure all stakeholders have the information they need to navigate the pilot program successfully? Here are some helpful tips:


  • Be proactive and educate management and the board about the program and its effect on trading
  • Update your website and engage retail investors about the program and how your company is impacted. Include links to SEC and FINRA communications about the pilot program (and save valuable time and resources by reducing retail investor queries)
  • Engage with the sell side to solicit comments about the program. Explore and support the potential for additional research coverage.
  • Monitor trading. Take advantage of tools that help shed light on trading conditions and explain the drivers behind trading and price performance in your stock and those of your peers. IROs armed with real intelligence about trading drivers and price performance will be best positioned to answer questions from internal and external stakeholders.

Final thoughts.

IROs have long noted the difficulty of attracting sufficient sell side coverage and support for their stocks. The SEC?s pilot program is an effort to address that issue by walking back some of the regulatory changes that have altered U.S. capital markets since 1997. For IROs this step towards reinvigorating market support for small caps will require educating management and boards, as well as retail investors and other stakeholders.



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