Late last night, the Securities and Exchange Commission approved a long-awaited program to trade small-cap stocks (less than $3 billion in market capitalization) in increments of five cents, rather than a penny.
This plan has been under discussion for years. Ever since trading increments went from sixteenths ($0.0625) to a penny in 2000, traders have argued that small-cap stocks have seen less trading. Widening the spread, some say, will allow more incentive to trade small-cap stocks and may also increase analyst coverage, drawing more attention to stocks that would otherwise languish.
Others doubt it will make much of a difference.
The plan as approved divides the small-cap universe into three separate test groups, with 400 stocks in each group.
The first test group has minimum five-cent trading increment, with no exceptions. The second group would have some exceptions, such as allowing orders to be executed at the midpoint between buy and sell orders.
The third group is the most controversial: It will require that off-exchange trading platforms (dark pools, mostly) provide price improvement compared with the current best orders in the market. This “trade-at” rule is designed to prevent orders from going to dark pools and has been championed by exchanges, which are the obvious beneficiaries.
A fourth control group of stocks would see no change to their quoting and trading.
The program will last two years.