Pragma Securities (Pragma), a multi-asset quantitative trading technology provider, has published new research showing that the Securities and Exchange Commissions (SEC) Tick Size Pilot Program has had a negative impact on market quality and execution – costing investors more than $300 million since it was implemented.
The research paper, entitled Tick Size Pilot – Evaluating the Effect of the Pilot Program on Execution Quality, estimates that investors trading stocks priced under $40 incurred significant costs. The total additional cost for all Test Group stocks could exceed $350 million by October 2018, when the pilot is expected to conclude.
Born out of the Jumpstart Our Business Startups Act (JOBS Act), the SECs two-year Tick Size Pilot Program commenced in October 2016. It was intended to evaluate whether widening the minimum quoting and trading increments – or tick sizes – for stocks of smaller capitalization companies (under US$3 billion) would improve the market quality to the benefit of U.S. investors, issuers and other market participants.
David Mechner, CEO of Pragma Securities, comments: While the SECs Tick-Size Pilot was launched with the intent of helping investors and issuers, the outcome has been very different. Concerns around execution quality and costs for investors were raised early on, and proved to be well-founded. Given our findings, we strongly recommend that the Tick Size Pilot be unwound at the end of the Pilot period.
The following is an excerpt:
On May 6, 2015, the SEC approved the NationalMarket System (NMS) Plan by the National SecuritiesExchanges and FINRA to implement a Tick Size PilotProgram that would evaluate whether widening theminimum quoting and trading increments – or ticksizes – for stocks of smaller capitalization companieswould improve the market quality of these stocks forthe benefit of issuers and investors. The NMS Planspecified three Test Groups (see definitions of eachgroup in Appendix) of approximately 400 securitieseach to be quoted in $0.05 increments, as well as aControl Group that would be quoted and traded as before. The pilot officially commenced on October 3, 2016, and in this note we evaluate market microstructure quality of the stocks included in the pilot based on a proprietary data set of over several hundred thousand parent VWAP orders, uniformly split between Test and Control Group securities and spanning the period from January 1, 2017 to June 15, 2018.
Major Conclusions Prgma Securities drew:
We find that for securities priced under $40,which represent more than 70% of the TestGroup, there is a significant degradationin execution quality for the Test Groupsecurities relative to the Control Group.
We estimate that ordinary investors trading Test additional shortfall costs of over $300 million.
