Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

FINRA and the exchanges have complied with an SEC order to establish a national market system plan to implement a targeted 12-month pilot program that will widen minimum quoting and trading increments (tick sizes) for certain stocks with smaller capitalization.  “Smaller capitalization” stocks are those with a market capitalization of $5 billion or less; an average daily trading volume of one million shares or less; and a closing share price of at least $2 per share.

At the risk of digressing, there are many stocks in the under $5 billion market cap category that do not seem to have been punished by the onslaught of decimalization in the way of a dearth of research and the like.  One has to wonder how the issuers of the relatively healthy stocks feel about being made a guinea pig in the pilot program.

Returning to the previously well-known details as ordered by the SEC, the SEC order specified  a control group will be quoted at the current tick size increment, $0.01 per share, and trade at the increments currently permitted.   The first test group would be quoted in $0.05 minimum increments and trading could continue to occur at any price increment that is permitted today. There are two other test groups with a $0.05 minimum with different trading rules.  The pilot program would be in effect for a year.

What has not been previously known is how issuers will be slotted into the control and test groups.  According to the plan submitted by FINRA and the exchanges, an operating committee will oversee the pilot security grouping process.  The operating committee will select the pilot securities to be placed into three test groups by means of a stratified random sampling process. To effect this sampling, each of the pilot securities will be categorized as having:

  • a low, medium, or high share price based on a three month measurement period of volume weighted average price, or VW AP,
  •  low, medium, or high market capitalization based on the last day of a measurement period, and
  • low, medium, or high trading volume based on the consolidated average daily volume, or CADY, during the measurement period,

yielding 27 possible categories. Low, medium, and high subcategories will be established by dividing the categories into three parts, each containing a third of the population. Pilot securities will be randomly selected from each of the 27 categories for inclusion into the test groups.

Each primary listing exchange will make publicly available for free on its website a list of those pilot securities listed on that exchange and included in the control group and each test group.


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