Tahoe Truckee Market Beat: The new nickel tick size pilot program
Starting Monday, October 3, 2016, some smaller companies started trading in nickel increments. There hasn’t been a pricing change for stock trading like this for fifteen years, since 2001.
In 2001 stocks began trading in decimals, which was a nice change after years of trading in fractions. Prior to 2001, the smallest increment was a sixteenth, which equals 6.25 cents. Trading in penny or one-cent increments lowered costs for investors and traders considerably.
The spread is the difference between the bid price and the ask price. If you wish to sell a stock, you sell at the bid price. If you desire to purchase a stock, you have to buy it at the ask price.
In the days of fractions, before 2001, the minimum spread between the price you have to pay and the price you could sell at was a sixteenth, or 6.25 cents. After decimalization, the spread lowered to one penny for highly liquid stocks, but could be higher for thinly traded issues; however, the increment was still one cent.
The new program is a part of the JOBS Act, which was passed by Congress in 2012. JOBS stands for Jumpstart Our Business Startups and was designed to help small businesses.
Starting this week, the minimum increment will go to five cents. On Monday, only ten stocks were on the list, but there will 1,200 by the end of the month. To be listed on the new nickel tick size, stocks have to have a market cap of less than $3 billion and trade less than one million shares per day on average. The pilot program will run for two years.
While the pilot program runs, the SEC, Securities Exchange Commission, will monitor trading data on the stocks for several data points. A report will be out in April 2018 on the effectiveness of the program.
Proponents of the program think that by trading in nickel increments, investment banks will be more likely to act as market makers for small company stocks and will provide more research on them. It could also be better for small private companies who wish to go public for the first time.
Critics of the plan are worried that it will likely lead to increased trading costs for investors. This is one of those changes we’ll have to monitor to see just how effective it is.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.