Will Raising Bid-Ask Spreads Increase MicroCap Liquidity?

Ian Cassel Blog, Question & Answer Leave a Comment

Reuters published an article on Friday stating that the SEC is thinking about raising trading increments for small-microcaps in hopes of increasing liquidity. They are talking about increasing the minimum spread from 1c to 5-10c. The logic is wider bid-ask spreads = more market makers will make markets = more liquidity = more trading = more revenues to financial institutions = more jobs.  I think this = INSANE.   Lets hope that if it is implemented it would be limited to $5.00+ PPS stocks. Increasing the spread of lets say a $1.00 stock from 1.00 (bid) x 1.01 (Ask) to 1.00 x 1.10 makes me want to throw up. And when has the government started caring about increasing financial institutions revenues?  Anyway, enough of my rambling, here is the article:

SEC mulls raising trading increments for small caps

U.S. regulators are considering whether stocks of small companies should be priced in increments of more than a penny, a change that could affect more than two-thirds of listed companies.

The Securities and Exchange Commission thought it settled this debate in 2001, when it ruled that stock prices should move in penny increments, ending a practice of quoting stocks in fractions.

But under the JOBS Act passed earlier this year, regulators must reexamine whether bigger increments make sense for smaller companies, as a way to spur more capital formation and trading, which could help employment.

For dealers, who profit from buying shares at one price and selling them at a price that is often one notch higher, increasing the trading increment could bring millions of dollars of additional revenue.

But consumer advocates say dealers’ gains are investors’ losses, and that trading increments should therefore remain at a penny.

This month, the SEC is expected to publish a report on whether penny ticks have harmed small cap companies. Regulators are likely to study the issue at length, so a decision could be months away, according to people familiar with the SEC’s thinking.

A shift in trading increments could affect 70 percent of listed companies, depending on how small company stocks are defined, according to Russell Investments, the Seattle-based fund research and consulting firm. Companies with less than $2 billion in market value are typically considered small capitalization companies.

Brokers say bigger trading increments would allow them to regularly trade shares of companies that they ignore now.

Under the current system of quoting in pennies, if 200,000 shares of a stock trade in a day, and they trade in increments of a penny, dealers could end up sharing $2,000 of profit a day from buying the shares at one price and selling them a penny higher. With such a small pool of potential profits, many dealers will not bother.


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