Tick Size Pilot Program – how to deal with it

On 3rd of October SEC and FINRA will start “Tick Size Pilot Program”, something that will influence your trading on 1200 stocks listed on US Stock Markets.

How it will affect your trading and how does it work? I will explain it in article below.

Tick Size Pilot Program

The Tick Size Pilot is a data-driven test to evaluate whether or not widening the tick size for securities of smaller capitalization companies would impact trading, liquidity, and market quality of those securities.  The pilot will consist of a control group and three test groups, with each test group having approximately 400 securities.

Tick Size Pilot Progam – groups

The groups are defined as follows:

• The control group will be quoted and trade at their current tick size increment.
• The first test group will be quoted in $0.05 increments, but will continue to trade at their current price increment.
• The second test group will be quoted and trade in $0.05 minimum increments, but would allow certain exemptions for midpoint executions, retail investor executions, and negotiated trades.
• The third test group will adhere to the requirements of the second test group, but will also be subject to a “trade-at” requirement. There will also be an exemption for block size orders.

Example of execution in each group

Ok, so how it will looks like in real trading. I will show you it on example. But if it will be the same in reality, we will see after 3rd of October.

BID: 10.10$    |    Offer 10.12$
I want to open long position.

Group 1: I need to send order with minimum price of 10.15$. My order will be rejected if I try to send a limit order at 10.10$, or 10.11 or routed to 10.12-13.14. Minimum increments is 5 cents, so at least it should be 10.15$. My order has minimum 5 cents increments, but it could be filled at better price. So if there is order at 10.12$, 10.13$ or 10.14$ you will get it at this price. If you decide to close position, you should also remember about 5 cents increments.

Group 2: In this group I’m not sure how it will works. Looks like my orders will be filled only at 10.15$. But what with orders that stay between 10.10$ to 10.15$. I’m not sure.  If you send order that seeks liquidity in midpoint, you will be able to get filled at 2.5$ increments).

Group 3: The same like Group 2. But if there is any dark pools, you will be also able to get filled on them.

Hmmm… looks strange, yeah? How it will increase liquidity if this way I will not be able to open position at prices that I’m able to open now.

Which stocks take part in Tick Size Pilot Program

This Program will be tested on stocks with smaller capitalization. I checked whole list, maybe 20-30 stocks that I’ve been trading in last years. So I think it will not affect my trading. But what about you?

Here you can download list of stocks that will take part in Tick Size Pilot Program: Tick Size Pilot Rollout List.

More information about Tick Size Pilot Program

If you would like to read more about this program, you can check FINRA website: Tick Size Pilot Program.

There is also interesting article about that in Bloomberg: SEC may risk harming investors with “trade-at rule” for stocks.

What you think about this program? Write your comment below.