The Securities and Exchange Commission (SEC) revealed that the Financial Industry Regulatory Authority (FINRA) and the national securities exchanges submitted a proposal to establish a national market system plan intended to widen the minimum quoting and trading increments (tick sizes) for certain stocks with smaller capitalization.

According to the SEC, the pilot program would include stocks with $5 billion or less market capitalization; an average daily trading volume of one million shares or less and a closing stock price of at least $2 per share.

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SEC to seek public comment

According to SEC, it would seek public comment for the proposed plan for 21 days. The proposed plan is subject to the approval of the commission after the public comment.

In a statement, SEC Chairperson Mary Jo White said, “This is an important step for a valuable initiative that could have meaningful implications for market quality. I look forward to the public comment on the proposal and the expeditious development of a final pilot program.”

The SEC instructed the exchanges and FINRA to develop a proposal for a tick size pilot program in June.

12-month pilot program details

The commission plans to implement the proposed national market system plan as a 12-month pilot program. The SEC intends to use the pilot program to assess whether the changes would improve the market quality for stocks with smaller capitalizations for the benefit of investors and issuers.

The pilot program would be composed of one control group and three test groups (each with 400 securities) selected by stratified sampling.

The SEC explained that the pilot securities under the control group would be quoted at the current tick size increment of $0.01 per share and trade at the currently allowed increments. It would represent a baseline for analysis during the pilot period.

On the other hand, the pilot securities under the first test group would be quoted in $0.05 increments, the trading would continue at any price increment currently allowed.

The pilot securities under the second test group would also be quoted in $0.05 minimum increments, and traded in $0.05 minimum increments subject to certain exceptions.

Meanwhile, the pilot securities in the third test group will be subject to the similar minimum quoting and trading increments (and the same exceptions) as the second test group. In addition, it would be subject to a ‘trade-at-requirement,” which prevents price matching by a trading content that does not display the best bid offer.

Exchanges, FINRA to complete assessment

Under the pilot program, the exchanges and the FINRA are required to collect and transmit data to the SEC. The data should be available to the public in an agreed-upon format. The FINRA and the exchanges would complete the assessment regarding the impact of the pilot program and submit it to the commission.

More on the proposed plan here