A U.S. pilot program will attempt to improve market quality for small-cap stocks by changing how much traders can bid and ask for the securities.
In June, the SEC told American exchanges and the Financial Industry Regulatory Authority to work together on a plan to test whether larger stock price increments for small-cap companies would improve market conditions.
The group is proposing an experiment that involves 1,600 stocks traded on U.S. exchanges. Companies with market capitalization of less than $5 billion, average trading volume of 1 million shares or less, and a closing price of at least $2 a share will be included in the study.
The stocks will be divided into four equal groups. One group will continue to trade under current rules, with price increments (known as tick size) of one cent per share. Another group will have quotes in minimum five-cent increments, but trading would be permitted at any standard increment. A third group would both quote and trade at five-cent increments, and also be subject to a trade-at requirement. Such a requirement would require a broker to trade on a public exchange unless it could offer a meaningfully better price.
After a 21-day public comment period, it will be up to the SEC to approve the pilot. The test would last a year, and the results would be publicly available. Afterward, FINRA and the exchanges will report to SEC on the results, and the SEC will decide whether to implement any permanent changes to small-cap trading.