Increasing Tick Size: What Will It Do and At What Cost?

As a recent participant in an SEC Roundtable on Decimalization, it's clear that there is debate among market participants on whether the SEC should conduct a pilot program that increases the tick size for certain small and middle-capitalization stocks. Some market participants believe that this pricing move would give a boost to small and mid-cap trading and also provide an incentive for small and mid-cap companies to go public.

We, at Fidelity Capital Markets, feel there are larger factors -- outside of decimalization -- that have influenced the small and middle-capitalization markets, namely liquidity, float and position concentration. Smaller companies tend to be difficult to trade because of the number of shares publicly available and their concentration of ownership.

Some say that artificially increasing the tick size of small and mid-capitalization companies would help support the economics of firms to create research for those companies. The SEC should ensure that its analysis includes the economic impact to the investor as well as the potential benefit to the market maker. Experimenting with tick size may help highlight these companies, but there are also other ways to incentivize market participants to do that, such as reformulating the current business model of bundled services sold on a commission basis.

[The trading community had a lot to say about the SEC Decimalization Roundtable. To read the community's reaction, visit: The SEC Decimalization Roundtable: The Industry Responds on Twitter.]

One solution brokers might consider is charging higher commissions for order execution, using generated revenue to subsidize research analyst coverage of smaller companies. If the economic lever exists for firms to increase commission costs to create opportunities for a more robust research market for small and middle-capitalization companies, why isn't that taking place? Charging commissions for order execution, as long as it doesn't increase total trading costs, would make all market participants more accountable.

Decimalization and IPOs
Moreover, we have not seen evidence that decimalization has had any impact on the IPO decision making process. A variety of events have taken place over the past dozen or so years that we believe influenced the IPO market, such as the Sarbanes Oxley Act of 2002, the credit crisis of 2008-2009, bank recapitalization/TARP program and low valuations, and declining overall market liquidity.

CEOs and CFOs of private companies consider many factors when determining whether or not to issue an IPO. Those include, among other items, disclosure requirements, the need for primary capital, acquisition strategy, employee retention, sector sentiment, market sentiment and valuations. In other words, we believe that macroeconomic and regulatory factors are the primary drivers of the IPO market, not decimalization.

While we strongly believe that it is important to work with policymakers to ensure that the appropriate balance is struck between regulatory oversight and market discipline, we are wary of disturbing a highly efficient market structure, particularly when it's unclear whether the benefits of increasing tick sizes outweigh the costs to market participants.

Brian Conroy is president of Fidelity Capital Markets, a division of National Financial Services LLC. Member NYSE, SIPC.

Views and opinions expressed are of the speaker as of February 28, 2013 and are subject to change at any time based on market and other conditions. Fidelity Capital Markets does not provide advice of any kind. This information is not individualized and is not intended to serve as the primary or sole basis for your decisions as there may be other factors you should consider.