Securities executives are trying to determine if the 12-year-old decision to narrow the price increments for American stock trading has harmed investors, according to two people with knowledge of the matter.
Representatives from exchanges, brokers, mutual funds and regulatory agencies held two conference calls yesterday to discuss concerns about market structure, said the people, who requested anonymity because the discussions were private. One topic was the U.S. mandate in 2001 to trade equities in pennies rather than eighths or sixteenths of a dollar, they said.
Compressing what traders call tick sizes reduced profits for human market makers and helped drive the ascent of high-frequency traders, which now account for about half of U.S. volume, according to data compiled by Tabb Group LLC. Widening price increments for smaller companies to a five or ten cents could spur trading and prompt more initial public offerings, according to U.S. Representative Sean Duffy, who has sponsored legislation to test such a shift.
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“There are a couple of groups that are really driving this and want it to happen, and it seems like everybody else may not be convinced it’ll make a huge difference but feels it should be tried because it probably won’t hurt anything,” said Justin Schack, partner and managing director for market structure analysis at Rosenblatt Securities Inc. He declined to comment on the ICI meetings.
Yesterday’s talks were the third hosted in 2013 by the Investment Company Institute, a trade group whose members manage $16 trillion, according to two people with knowledge of the matter. This year’s participants have included senior officials from the New York Stock Exchange and Nasdaq Stock Market, mutual fund companies Fidelity Investments and T. Rowe Price Group Inc., broker-dealer Morgan Stanley (MS:US), and the Securities and Exchange Commission, among others, according to one of the people.
Representatives of those firms declined to comment on the meetings.
Supporters of larger price increments for some stocks argue that it would encourage more volume for small companies by making trades more profitable for market makers.
The Jumpstart Our Business Startups Act, signed into law last year, instructed the SEC to study the impact of penny pricing and mandate a new minimum increment of less than 10 cents for “emerging growth companies” if the regulator found that was warranted.
Bloomberg News reported in June that executives from the biggest American exchanges were drafting a pilot program that would widen tick sizes on about 100 smaller and less-liquid securities for a year.
Earlier this month, Duffy, a Republican representative from Wisconsin, co-sponsored a bill that would allow “small, emerging growth companies” to participate in a five-year test of quoting their shares in 5- or 10-cent increments. The bill was approved by the House Financial Services Committee. Before the switch to pennies, shares changed hands in increments of 6.25 cents or 12.5 cents.
Not everyone is convinced that such changes will lead to more trading in stocks of smaller companies.
The desire to review trading practices is being driven in part by regulators paying more attention, said Ari Rubenstein, chief executive officer of automated market maker Global Trading Systems. The SEC introduced a new public website in October that displays data from its new Market Information Data Analytics System.
“What feels different is that I believe that the institutions that regulate us are far more familiar at a more granular level with market structure,” he said. “They are much more familiar with how the market works.”
The discussions at this year’s ICI meetings have focused on a range of market structure issues, including disclosure requirements by the private venues known as dark pools and the practice of exchanges paying trading firms to trade, the people said. Participants have used the meetings to air opinions on changes to equity markets during the past decade and a half, one of the people said.
The private ICI-led meetings are taking place amid a public debate over the reliability of equity markets. In recent months, senior SEC officials and the trade group for brokers have questioned the regulatory protections exchanges enjoy. The chief executive officer of the New York Stock Exchange’s new owner, IntercontinentalExchange Group Inc., said the industry practice, known as maker-taker, of paying trading firms to place orders should be reconsidered. The group that regulates brokers has proposed greater transparency for dark pools.
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