Tagged: tick size

Sizing Ticks

Ticks are blood-sucking insects, about how regulators have viewed spreads between stock prices.

Country singer Brad Paisley sings that he’d like to walk you through a field of wildflowers and check you for ticks. As a kid in tick country on Oregon’s Snake River breaks, I pulled plasma-bloated fatsos off my skin and watched my grandmother touch match-reddened tweezers to protuberant tick buttocks on my grandfather’s scalp.

Now the Securities and Exchange Commission is studying ticks. It’s in regulatory parlance SEC Release No. 73511, File No. 4-657.  You can comment by email at rule-comments@sec.gov, or on the website, here (include “File No. 4-657” in any case).

Fittingly, we’re in New York this week where ticks began, a timely escape from the season’s first deep freeze in Denver.  Your stock trades in penny increments, or ticks, thanks to rules created by the SEC in the 20th century.

The belief then was that brokers were charging too much with wide spreads in securities that jobbed small investors. Shrink ticks to desiccated carcasses and mom and pop would win went the reasoning. Fifteen years after slimming ticks, the SEC has ordered a study on widening them. The SEC didn’t say it made a mistake last century. It just told exchanges, “See if there’s a better way.”

I’ve read File No. 4-657 from introduction to footnotes and definitions.  We’ve summarized before but hitting highlights, the exchanges have proposed three clusters and a control group comprising effectively all the 1,750-ish small-caps in the market. Stocks will quote in five-cent spreads but trade anywhere between, or trade in five-cent spreads, or trade at five-cent spreads with a “trade-at” rule, this latter blasted by brokers because it prohibits undercutting prices at exchanges. (more…)

Spread Too Thin

What if?

Those two words branded with a question mark may rank 2nd all-time behind “what is the meaning of life?”

What if…public companies could set spreads in their own trades?

Before we ponder that, let’s tip hats to IROs Moriah Shilton at Tessera Technology (TSRA) and Kate Scolnick at Seagate (STX), who demonstrated such adroit command of market structure in yesterday’s NIRI webinar on why trading matters in the IR chair (replay available for NIRI members). Expertise like theirs is the future of our profession. Knowledge, as always and ever, is power.

Speaking of knowledge, the SEC yesterday convened a round table on price-spreads in trading, commonly known as “tick-size.” On the panels were finance professors, representatives from major exchanges, venture capitalists, folks from Fidelity and Invesco – and thankfully, David Weild at Grant Thornton/Capital Markets Advisory Partners, and Pat Healy from Issuer Advisory Group, both strong advocates for the interests of public companies.

But there wasn’t a CEO, CFO or IRO from a public company (Moriah Shilton and Kate Scolnick should be on these panels!).

Here’s the issue. Ever since increments between the best prices to buy and sell shares were set by law in 2001 with Decimalization, trading volume has exploded but ranks of public companies and broker-dealers have fallen. In 1997, there were 7,500 public companies. Today there are 3,700 in the National Market System.

At the time, a belief prevailed that small investors couldn’t get a fair shake because brokers and specialists controlled prices in stock markets. So the SEC mandated that prices be set in penny increments. No more trading in eighths or sixteenths of a dollar.

In 1983 there were roughly 450 IPOs in the USA. Thirteen years later in 1996, about 700. The last year US markets remotely approached “hundreds” of IPOs – and thus, hundreds of IR jobs – was in 2000, right before Decimalization. (more…)