OPINION: Let’s Re-Think the Tick-Size Pilot
Can regulators create liquidity out of thin air?
The two-year tick-size pilot, which completed its phased rollout on the October 31, is an attempt by the U.S. Securities and Exchange Commission to answer this question.
Early anecdotal results have the dark liquidity pools benefiting the most from the tick-size pilot so far, according to a few industry insiders.
They’ve seen a slight uptick in the trading in the symbols that are part of the pilot’s group one and group two, which trade as usual and in a five-cent increment respectively.
However, the symbols to watch are the ones in group three, which trade in five-cent increments but also have a trade-at requirement. These symbols only will trade in non-displayed markets if those markets can improve on the displayed NBBO and not just meet it.
It’s doubtful that the market will see a massive increase in trading volume in the second and third group.
A five-cent increment might lure a few more participants into the small- and mid-cap markets, but most likely they would be retail investors instead of institutional ones.
There’s a reason that these stocks are illiquid. It’s called risk.
In today’s risk-averse environment, expecting greater growth in this market is optimistic at best.
If the SEC wants to encourage a more efficient transfer of risk of illiquid instruments, it should give up its one-size-fits-all strategy for the equities markets.
Instead, the regulator should introduce a quote-driven market for the small- and mid-cap growth companies.
It’s not a perfect model and would increase the quote spreads compared to order-driven markets. However, it would bring a bit more liquidity, which is what all investors want.
The UK and Canadian markets have their dedicated markets for emerging and growth companies. It is about time that the US equities markets leverage their experiences.
More on Market Structure:
- SEC Puts Reg NMS Review out for Comment
- Global Liquidity Focuses on Building Buy-side Adaptive Algorithms
- Treasuries May Get ‘Reg ATS’d’
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