Fifteen Years After Decimalization, ‘Tick Size’ Widening for Some Small-Company Stocks
The move to nickel-increment price quotes is part of an experiment into whether widening tick sizes can boost trading in small-capitalization stocks, even as doing so could mean higher trading costs for investors.
The effort, known as the Tick Size Pilot Program, is set to start Monday with 10 stocks, and by the end of October is expected to involve about 1,200 companies. The Securities and Exchange Commission began pursuing the program in 2014 after lawmakers questioned whether larger trading increments for small stocks could boost interest in small-company shares and, in turn, initial public offerings and economic growth.
Decimalization was widely viewed as good for investors because it slashed profits for market-makers, the intermediaries that commit to buying or selling stocks throughout the trading day. Market-makers tend to profit from wide bid-offer spreads, which are the difference between prices to buy and sell a stock. With decimalization, such spreads became smaller.
Since then, some have said the shift harmed small-capitalization companies, arguing it reduced the incentives for market-makers to trade their stocks.
With large companies, which have high volumes of trading activity, market-makers can profit despite tight spreads because the shares trade so often. But small-caps are often thinly traded. So here comes a move by profit hungry market makers to profit off of common investors!
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