How did we get here?

Penny trading increments, pressure on research departments and industry fragmentation have all contributed to lower liquidity for smaller public companies.

In 2001, the SEC moved trading from fractions to decimals. In doing this, trading increments changed from 1/16ths ($0.0625) to a penny ($0.01) across all securities. The narrowed trading increments provided benefits for investors buying the most liquid securities but had the unintended consequence of making it less profitable for market makers to provide liquidity in small-cap securities. As liquidity in small-cap securities dried up, institutional investors had to back away from investments in these securities because it was harder for them to get into and out of those investments, further exacerbating the liquidity situation.

Another challenge was presented by the Global Research Settlement in 2003, which mandated a separation between investment banks and research departments to reduce conflicts of interest. This change meant banks could no longer fund such large research functions, particularly in a low commission, low spread marketplace. Banks cut back on research, especially in small-cap securities, which resulted in less research being available on smaller public companies.

Lastly, regulatory changes adopted in 2005 further reduced the incentive for market makers to provide liquidity because they were moved to the end of the line for execution decisions by broker-dealers.

When combined, this structure led to a more difficult trading environment for many smaller public companies. This pilot is designed to test whether a new structure would improve liquidity in the securities of smaller public companies.

WHAT COMPANIES ARE ELIGIBLE FOR THE PILOT?

Operating companies that have been listed at least six months, have $3B or less in market cap, an average daily volume of one million shares or less and volume weighted average price of at least $2.

HOW WILL THE PILOT WORK?

Of the eligible companies, 1,200 companies will be randomly placed into three test groups (400 per group) and the remaining will be in the control group. The three test groups each have different quoting and/or trading requirements as described below:

  • Control group: business as usual ($0.01 increments)
  • First test group: minimum quoting increment changes from $0.01 to $0.05; there is no change to trading requirements so executions can still occur at any increment.
  • Second test group: minimum quoting increment changes from $0.01 to $0.05; trading is restricted from occurring in increments less than $0.05 unless an exception applies.
  • Third test group: minimum quoting increment changes from $0.01 to $0.05; trading is restricted from occurring in increments less than $0.05 unless an exception applies and displayed liquidity receives primacy over dark liquidity at the same price, known as the "trade at" rule.

When will I find out if I'm included and which group I'll be in?

The information is available at: ftp://ftp.nyxdata.com/Tick_Pilot/Tick_Pilot_Historical/NYSE_Group_Tick_Pilot_Assignments.txt

What if I don't want to participate?

In compliance with the SEC’s order, participation is not optional and securities are placed into different test groups on a random basis.

What do I need to do to prepare?

Nothing. You'll automatically be assigned a group and the trading framework will automatically go into effect based on your group.

WHAT HAPPENS WHEN THE PILOT ENDS?

Although the Pilot will not end until October 2018, the SEC will review results prior to the end of the Pilot to determine if any aspects of the Pilot should be made permanent.

IF A SECURITY'S MARKET CAP MOVES ABOVE $3B DURING THE PILOT PERIOD, WILL THE SECURITY REMAIN IN THE PILOT?

Yes. Companies will remain in the Pilot regardless of whether their market capitalization or average daily trading volume changes during the course of the Pilot Period.

WHEN DOES THIS CHANGE TAKE EFFECT FOR MY COMPANY?

The rollout begins on October 3rd. For your company’s specific rollout date, please review this rollout schedule.