U.S. Exchanges Seek Test Program for Small, Mid-Cap Stock Pricing

By Sarah N. Lynch

Feb 5 (Reuters) - Stock exchange executives on Tuesday will urge U.S. securities regulators to support a program to test a change in the way shares are priced, in a bid to generate more investor interest in small and mid-sized companies.

Representatives from NYSE Euronext, Nasdaq OMX and BATS Global Markets will be among the experts to gather during a daylong roundtable at the Securities and Exchange Commission to discuss tick sizes, or the minimum pricing increment that can be used to trade securities.

The practice known as "decimalization," in which the SEC required all listed stocks to be traded and quoted in one-penny increments instead of in fractional increments such as one-sixteenth of a dollar, was introduced in 2001.

That change was prompted by concerns that the use of fractions was leading to excessive profits for market-makers.

Stock Exchange SECSince then, however, some critics have complained that such small increments have reduced trading margins to the detriment of smaller companies, and need to be increased from a penny.

Because of the lack of liquidity in the stocks, the shares have failed to attract sufficient interest from large institutional investors.

In addition, critics argue that penny increments reduced trading commissions and made it less attractive for research analysts to cover certain smaller companies. Market interest in those companies can shrink with less available research.

Colin Clark, a senior vice president at NYSE who is slated to speak Tuesday, said an increase in the tick size could encourage market-makers to display volume and help attract more institutional investors in small-cap companies.

He added that NYSE would be open to partnering with other exchanges to create a program to test the waters for increasing the tick size.

"We think that could be a good next step," he told Reuters on Monday. "We see broad support from the community in aggregate....The time is ripe for the SEC and the industry to move forward with a pilot to collect some information to determine if the benefits outweigh the costs."


Congress already took some steps last year to help small businesses raise capital and go public when it passed the Jumpstart Our Business Startups (JOBS) Act.

The law created a new class of company called "emerging growth" and aimed to make it easier for them to go public by reducing regulatory burdens.

The law did not mandate an increase in the tick size, though it required the SEC to study the issue.

That study, which was released in July, recommended against proceeding with any specific rulemaking to increase tick sizes. It did call for having a roundtable to generate ideas about how a potential pilot study could work.

So far, there seems to be a consensus about the desire to explore some sort of change to the tick size structure.

Last week, the SEC's Advisory Committee on Small and Emerging Companies, an expert panel offering policy advice, voted to urge the SEC to increase the tick size for small companies and let those companies select their own tick size within a designated range.

Eric Noll, an executive vice president at Nasdaq, told Reuters on Monday he could envision a year-long study establishing an "intelligent tick size" that gets away from the current "one-size fits all" approach.

"For certain stocks, it might be a nickel," he said. "For other stocks, it might be a dime."
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