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North American conglomerate KCG Holdings (NYSE: KCG) today announced that it has published market commentary, “Who Gets the Short End of the ‘Tick?” by Phil Mackintosh, the company’ s Head of Trading Strategy and Analysis. The data-driven report includes the following findings regarding the potential impact of the Security & Exchange Commission’s pilot program to widen tick sizes.
While the pilot program was originally designed to spur trading and research in small-cap stocks, the proposal, if implemented across all asset classes that meet the average daily value (ADV) and market cap thresholds, could ultimately impact a wide number of companies, including some S&P 500 names.
The market capitalization of companies in the pilot could be as high as $5 billion, trading up to one million shares per day. Full market-wide implementation of the proposal would require more than 66% of all stocks to trade in five-cent increments.
Less-liquid stocks will become easier to trade, according to KCG. Wider tick sizes should make the top of book deeper and less volatile. In fact, a new, wider National Best Bid and Offer (NBBO) should at least triple the depth of book in impacted names. According to KCG’s somewhat controversial findings, trading costs will likely go up, and wider spreads make it more expensive for investors to trade.
KCG’s analysis indicates that the use of dark pools will likely increase. Dark trades allow investors to mitigate higher execution costs, however as LeapRate has reported over the last few months, regulatory authorities outside North America have demonstrated polarized views on dark liquidity. Although off-exchange trading is specifically limited for a certain sub-set of stocks in the pilot, KCG considers that traders will still look for ways to hide their intention from other traders in lit venues.
The company considers that the implementation of wider tick sizes will add complexity to the marketplace. Wider tick size parameters will challenge order routing and limit order trading market-wide. This goes against an overarching concern of many participants that the market already is too complex.
“The breadth of securities covered by the proposed pilot, if implemented market wide, is significant. With well over half of all stocks potentially meeting the thresholds and possibly subject to five-cent increments, this proposal could become a major market structure development,” Mr. Mackintosh said. “At the same time, trade-at rules will be tested without also testing the impact of inter-related market structure issues, such as exchange fee structures and locked market rules.
To be sure, the pilot should deepen liquidity at the NBBO to great benefit. But there remain concerns that widening spreads will have negative consequences for the U.S. markets by eroding our global lead in many market quality measures including trading costs, liquidity, and robust derivatives and ETFs trading.”
On June 25, 2014, the SEC announced its order to the national exchanges and the Financial Industry Regulatory Authority (FINRA) to develop a 12-month pilot program to widen minimum quoting and trading increments, or tick sizes, for certain small-cap stocks. The SEC seeks data to assess if wider tick sizes will enhance market quality. The pilot includes stocks with a market capitalization of $5 billion or less; an average daily trading volume of one million shares or less; and a share price of $2 per share or more. The exchanges and FINRA must submit a plan detailing the pilot program by August 25, 2014, after which it will be published for public comment.
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