top of page

What is the Tick Size Pilot Program?


On October 3, 2016 small cap traders will see some big changes coming to the bid and ask prices of certain stocks. The new SEC tick size pilot test will begin in October, and selected small cap stocks will begin trading in five-cent increments instead of one-cent increments for the next two years. If this is the first you’re hearing of the tick size pilot, here are five things you need to know.

1. MOST STOCKS WILL NOT BE IMPACTED.

The average investor will likely not see any changes to his or her portfolio or trading. The pilot test consists of 1,400 stocks divided into three test groups and one control group. The 200-stock control group will continue trading as normal. All of the stocks included in the pilot test have market caps below $3 billion and average trading volume of less than 1 million shares. In other words, these stocks are typically extremely thinly-traded.

2. THE SEC’S INTENTION IS TO BOOST LIQUIDITY.

The entire idea behind the program is for the SEC to determine if increasing the spreads for thinly-traded stocks will improve liquidity in the market. The SEC is hypothesizing that larger spreads will provide brokers with more incentive to make markets in these stocks.

3. STOCKS IN THE THREE DIFFERENT TEST GROUPS WILL BE IMPACTED DIFFERENTLY.

As mentioned above, the 200 stocks in the control group will not be impacted at all. However, the three different test groups will begin trading under the following conditions:

Group 1: These stocks will all trade in five-cent increments without exception. Group 2: These stocks will also trade in five-cent increments, but certain “midpoint trading” exceptions will be allowed. Midpoint exceptions will allow for orders to be filled at a price halfway between the bid and ask prices. Group 3: These stocks will be subject to all the conditions of group two but will also be subject to a “trade at” requirement. According to the SEC, the trade at requirement is intended 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.”

From a trader’s standpoint, the takeaway is that spreads for all three test groups will shift from one cent to five cents. To see if any of your stocks are included in the test groups, check the Tick Pilot group assignments.

4. THE PILOT TEST LAUNCH COULD GENERATE SOME MARKET TURBULENCE.

According to Bloomberg, Wall Street insiders are expecting the launch of the pilot test to generate some volatility in the small cap market. Exchanges have had years to prepare for the pilot program, but some market experts are expecting technical problems and glitches when the program launches. Bats Global Markets Inc even sent a letter to the SEC arguing that the pilot test creates “an unacceptable level of systemic risk” to its software. Others argue that liquidity in the 1,200 test stocks will actually plummet as market makers look to avoid the risk associated with the program.

5. THE SEC MAY HAVE TO DO MORE THAN INCREASE SPREAD SIZES.

According to Bright Trading equity market structure analyst, and Benzinga PreMarket Prep co-host, Dennis Dick, the biggest drain on small cap liquidity isn’t narrow spreads.

“They may need to look at internalization and the rise in dark trading volumes if they really want to improve market quality in the small cap space,” Dick said. He pointed out that a large amount of trading volume has migrated off the exchanges to Over-the-Counter market makers. This migration leaves typical liquidity providers for small cap names feeling like they are simply setting the price for the stocks, assuming all of the risk and then getting their profits systematically siphoned off.

The test pilot should go a long way in determining the true cause of low liquidity among small cap stocks. The exchanges and FINRA will release preliminary assessments of the program in April 2018.

Disclosure: the author holds no position in the stocks mentioned.

This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy. The author content and perspective is solely attributed to the author.

Featured Posts
Recent Posts
Archive
Search By Tags
Follow Us
  • Facebook Basic Square
  • Twitter Basic Square

Billing & General Support - 

Disclaimer: “Day trading can be extremely risky…You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.”

 

MOJO Day Trading is a provider of stock market education. MOJO Day Trading is not a registered as an investment adviser either with the U.S. Securities and Exchange Commission or any other federal, governmental or regulatory authority. The business services and activities of MOJO Day Trading do not requires any such registrations. You understand and acknowledge that there is a very high degree of risk involved in trading securities. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented are for educational purposes only. Such picks, alerts, set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. Any and all information discussed is for educational and informational purposes only and should not be considered tax, legal or investment advice. A referral to a stock, commodity, cryptocurrency is not an indication to buy or sell that stock, commodity or cryptocurrency.

 

MOJO Day Trading may publish testimonials or descriptions of past performance but these results are NOT typical, are not indicative of future results or performance, and are not intended to be a representation, warranty or guarantee that similar results will be obtained by you. Michael Rich’s experience with trading is not typical, nor is the experience of students featured in testimonials. They are experienced traders. Becoming an experienced trader takes hard work, dedication and a significant amount of time. Your results may differ materially from those expressed or utilized by MOJO Day Trading due to a number of factors. We do not track the typical results of our current or past students. As a provider of educational courses, we do not have access to the personal trading accounts or brokerage statements of our customers. 

 

Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commissions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.

 

If you do not agree with any term or provision of our Terms and Conditions you should not use our Site, Services, Content or Information. Please be advised that your continued use of the Site, Services, Content, or Information provided shall indicate your consent and agreement to our Terms and Conditions.  

 

Copyright (c) MOJO Day Trading, LLC. 2012-2023. All Rights Reserved. No part of this presentation, webinar or any of its contents may be reproduced, copied, modified or adapted.

This does not represent our full Disclaimer. Please read our complete disclaimer
 

bottom of page