Blanche

Bigger ticks for small caps?

Tools

It would be hard to argue that small cap stocks have fared well in recent years.

Even when the market was in high-volume rally mode, these stocks have been mired in the same old low-liquidity, narrow-spread, lack-of-research-and trading-support muck. Lots of reasons have been put forth: Passive investing, high-frequency trading, decimalization and so on. We're at the point now that the industry is pondering some radical solutions, like allowing issuers to pay for market making services.

Now comes word that the SEC is pondering a move to boost the width of the spreads at which small cap stocks trade. Traders magazine reports the SEC plans to hold a roundtable to discuss that possibility, an event that could eventually lead to a pilot program, "whereby some small- and mid-cap stocks trade in increments greater than a penny."

Wide spreads would likely help attract volume, as it would make it easier for market makers and traders to make money on these stocks. That said, one of the most significant market goals over the last decade was to narrow spreads to give investors a break on trading costs. It seems we've hit a milestone as regulators and possible some investor advocates come around to the idea that razor-thin spreads have some deleterious consequences. 

A recent study by the SEC found no definitive evidence that penny increments should be relaxed for small caps. That study doesn't represent the final word for the agency, which just might be laying the groundwork for a major philosophical shift.    

For more:
- here's the article