While a penny can be a pretty big deal as far as earnings per share performance goes, when it comes to trading stocks, the National Market System (NMS) thinks and hopes the lowly cent, actually five cents, can potentially make a really big difference when trading stocks.
Starting by the end of this month, as a way to increase the attractiveness of trading and research in smaller cap stocks and to make going public more attractive, the NMS will implement its “Tick Size Pilot Program,” effectively widening the minimum quoting and trading increment by raising the tick size to a nickel from a penny.
By definition, a “tick” is a measure of the minimum upward or downward movement in the price of a security. If a stock has a tick value of one cent, each tick, or price movement is in one-cent increments per trade. As part of the test, each tick will be equal to five cents per trade.
As a by-product of the 2012 Jobs Act, the program is set to last for two years, following which a determination will be made if increasing the tick size increment will improve the liquidity, trading and market quality of stocks with market capitalizations of $3 billion or less; average daily trading volume of one million shares or less; and volume-weighted average price of at least $2.00 for each trading day. The test will be implemented on 1,200 stocks.
The NMS is the national system for trading equities in the United States, and includes all the facilities and entities which are used by broker-dealers to fulfill trade orders for securities, principally including the New York Stock exchange and Nasdaq.
While it is difficult to foresee what the impact of the test will be, the hope is that will allow for a bigger list of stocks that are accessible to quality institutional investors.
Roger Pondel, email@example.com