Small cap stocks and companies that issue them have something to cheer about today as legislation calling for a pilot program to boost trading has passed one part of Congress.
The U.S. House of Representatives passed the Small Cap Liquidity Act (H.R. 3448) today, sponsored by Congressman Sean Duffy (R-WI). The passage of the Act clears the way for a pilot program to promote an increase in tick size in these companys stocks – thus encouraging brokers to trade them and provide more research on them.
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The bill was spearheaded by the Equity Capital Formation (ECF) Task Force which is composed of Scott Kupor, Managing Partner at Andreessen Horowitz, and Jeffrey M. Solomon, CEO of Cowen and Company.
Tuesdays passage of the Small Cap Liquidity Act by the U.S. House of Representatives is evidence of growing support for meaningful market structure reform to help small-cap companies grow and thrive, as they are an important segment of our nations economy, said Mr. Kupor and Mr. Solomon in a joint release.
The ECF pointed out that small-cap public companies have suffered from a lack of capital formation. This has inhibited job creation, innovation and investment opportunities stemming from startups and small companies. Furthermore, the problem in the capital formation issue is the lack of trading liquidity in many publicly-traded small-cap companies. By increasing the tick size, it is hoped more brokers will provide research and encourage institutional trading in these small stocks.
The ECF released a report, From the On-Ramp to the Freeway: Refueling Job Creation and Growth by Reconnecting Investors with Small-Cap Companies, where it concluded that increasing tick sizes from 1 cent to 5 cents and limiting trading increments is a surgical fix to the market structure challenges facing the small-cap market.
We urge the Commission to consider a program, as suggested in the ECF Task Forces report, which provides clear and effective guidelines for implementation and realistic measurements of success and failure while ensuring investor protection, Kupor and Solomon said. A pilot trading program would allow a fair process to test market structure and would only include the small-cap market, which represents approximately 2% of total equity trading volume in the U.S.
