Tick Size Pilot Program

Tick Size Pilot Program
Name	Tick Size Pilot Program
Established	2016
Administered by	Securities and Exchange Commission
Related legislation	Dodd–Frank Wall Street Reform and Consumer Protection Act
Status	Completed (pilot ended 2018)

Tick Size Pilot Program The Tick Size Pilot Program was a structured regulatory experiment initiated to evaluate how mandated minimum quoting and trading increments would affect liquidity, spreads, and trading behavior in small-capitalization public company securities. Proposed and adopted by the Securities and Exchange Commission following concerns raised after the 2008 financial crisis and debates during implementation of the Dodd–Frank Wall Street Reform and Consumer Protection Act, the pilot sought to inform rulemaking affecting New York Stock Exchange, NASDAQ, BATS Global Markets, and other securities exchange venues. The program attracted participation and commentary from Institutional investor, retail investor, broker-dealer, market maker, and academic communities including researchers from Columbia University, University of Chicago, and Massachusetts Institute of Technology.

Background and Objectives

Regulators and market participants debated tick increment policy after shifts in market structure drove debates involving decimalization and minimum price variation rules in the United States. Policymakers including officials at the Securities and Exchange Commission and commentators from the Financial Industry Regulatory Authority raised concerns about execution quality for small-capitalization company stocks listed on exchanges such as the New York Stock Exchange and NASDAQ. The pilot’s objectives included measuring effects on quoted and effective bid–ask spread, displayed depth, order routing by broker-dealer firms like Goldman Sachs and Morgan Stanley, and trading activity by institutional investors such as BlackRock and Vanguard.

Design and Implementation

The program, adopted by the Securities and Exchange Commission order, divided eligible securities into test and control groups and mandated wider minimum quoting increments—commonly five cents or ten cents—on designated trading venues including NYSE Arca and BATS Global Markets. Implementation required coordination with self-regulatory organizations such as FINRA and system changes at market centers including NASDAQ and NYSE American. The pilot specified stratified sampling across listing venues and market capitalization tiers, applied to securities meeting criteria tied to listing on exchanges like New York Stock Exchange and NASDAQ and trading characteristics referenced by studies from Cornell University and University of Michigan. Compliance dates, reporting schedules, and data collection protocols were set to permit evaluation by SEC staff and academic partners from institutions including Harvard University and Stanford University.

Affected Securities and Market Participants

Eligible securities primarily included Nasdaq- and NYSE-listed companies within specified market capitalization bands, often focusing on stocks with average daily share prices below thresholds commonly associated with small-capitalization companys. Market participants affected comprised market makers, registered broker-dealers, retail brokers such as Charles Schwab Corporation and TD Ameritrade, and institutional traders including BlackRock and Fidelity Investments. Trading venues encompassed National Market System components, electronic communication networks like Instinet, and auction mechanisms managed by New York Stock Exchange. Listed companies whose trading liquidity and investor relations involved smaller-cap issues, and research communities including academics from Princeton University and Yale University, also engaged with pilot data.

Empirical Findings and Market Impact

Academic evaluations and staff reports from the Securities and Exchange Commission measured changes in quoted bid–ask spread, displayed depth, liquidity provision by market makers, and execution quality for retail investor orders. Studies by researchers affiliated with Columbia Business School, University of California, Berkeley, and London School of Economics found heterogeneous effects: some securities showed wider displayed spreads but increased displayed depth; other securities experienced reduced quote competition with no systematic improvement in execution costs for institutional investors. Empirical analyses referenced historical debates about decimalization and leveraged methods similar to those used in studies of the NYSE and NASDAQ structure. Research published in venues such as the Journal of Finance and working papers from National Bureau of Economic Research compared pilot outcomes against control groups using transaction data from Consolidated Tape Association feeds.

Criticisms and Legal/Regulatory Responses

Critics including trade associations, hedge funds, and academics argued the pilot risked harming price discovery and favored proprietary high-frequency trading firms that adjust algorithmic strategies to new tick constraints. Comment letters from organizations like the Securities Industry and Financial Markets Association and positions voiced by participants such as IEX Group questioned sample selection and the external validity of results. Legal scholars from Georgetown University and NYU School of Law debated administrative procedure, while some market participants sought reconsideration under rulemaking processes overseen by the Securities and Exchange Commission. The pilot’s findings prompted public hearings and contributed to subsequent SEC concept releases and staff reports.

Legacy and Subsequent Policy Developments

Although the pilot formally ended in 2018, its data informed later SEC staff reports, academic literature, and discussions about tick size policy in forums including the European Securities and Markets Authority and international counterparts like Financial Conduct Authority. Policymakers and exchanges adjusted display and order-type rules at venues such as NYSE Arca and NASDAQ OMX Group, and the debate shaped subsequent proposals on market structure, minimum price variation, and execution quality overseen by the Securities and Exchange Commission and evaluated by academic centers like Harvard Kennedy School. The program remains a referenced case in literature on market microstructure, cited alongside studies of decimalization and reforms after the 2008 financial crisis.

Category:United States securities regulation