Tick size increments are inextricably tied to the criteria that are utilized for determining those tick sizes, according to Hubert DeJesus, Managing Director, Global Head of Market Structure and Electronic Trading, BlackRock.
“If you want to have smaller tick sizes, or be more differentiated in the increments, you need to be much more discerning about the criteria that you’re using in determining what stocks are going to be constrained,” he said at the SIFMA’s Equity Market Structure Roundtable on April 19.
“We would definitely agree with using a multi factor approach to assessing that and making sure that we have really identified the right universe,” he said.
“We already have increments that are too small today. We think that an environment with a larger tick size would make more sense, commented DeJesus.
“We think there’s definitely a lot of positive benefits of that, not just in the way that those stocks trade, but thinking about how it counterbalances the effect of going smaller and tick sizes as well,” he added.
He said it is also important because “you should be addressing market structure holistically.
If we’re going to be fixing tick sizes, we should be thinking about fixing tick sizes across the board,” he said.
Meanwhile, Mehmet Kinak, Global Head of Systematic Trading and Market Structure at T. Rowe Price, said that when there’s that much uncertainty and risk, the best approach is to be conservative and take the most narrow approach.
“We’re not opposed to it from an institutional perspective. We’ve advocated for a ‘not one size fits all’ approach. We’ve been supportive of ticks, intelligent ticks, both narrowing and widening where necessary,” he argued.
“We’ve long advocated for access fees coming down, but specifically in a subset of securities that requires it. I would say, too narrow of a tick increment is harmful,” he added.
“We’ve seen data around that other way. So when we went from fractions, decimals, we saw displayed liquidity declined significant,” he commented.
When it comes to access fees, TRowe Price has been supportive of bringing that number down, but for very liquid names, where we believe intermediation is excessive, said Kinak.
“We believe that securities don’t need that intermediation because there’s liquidity already present in those particular names. I’m opposed to regulators setting price. It’s not a good thing,” he stressed.
The one factor Kinak always look at is quoted size at the touch. That’s an important factor to recognize because an average quoted spread of something could be a penny all day long, he explained.
“When I look at a security that’s trading penny wide for the majority of the day, but only has 100 shares available on the bid or the offer, that to me is not tick constrained. There is no competition in that name to narrow,” he said.
“I think a multi factor approach is obviously necessary, but I think quoted size is the most important factor to really consider when you’re looking at it,” he said.
Sapna C. Patel, Head of Market Structure and Liquidity Strategy at Morgan Stanley added that there are risks associated with technology changes.
“We’re looking at potentially four different round lot sizes. When you’re making changes to all these variables, on top of it you’re having people across the industry, touch their technology and make frequent changes to change access fee and tick size on a quarterly basis and change the lot size on a monthly basis,” she said.
That’s a lot of touching of technology across the street, and the market risk and the technology failure or something that we should think about in terms of balancing the benefits versus the potential risks, she pointed out.
She said we have experienced as an industry making tick size changes when the SEC put in place the tick size pilot.
We had to put in place the changes at one point and then we also had to undo those changes, but it required touching of technology twice, she commented.
The buy-side had to make changes, the sell-side had to make changes, the exchanges had to make changes and third party vendors had to make changes, she explained.
“That’s a lot of market participants touching their technology on a quarterly or monthly or quarterly basis. I think we need to weigh the benefits of making those type of frequent changes versus the potential risks of a technology failure in that situation,” she stressed.
