Tick Size and Listings

In earlier posts I have argued for a smaller tick size to reduce rent-seeking. The Wall Street Journal reports today that there is a move to increase tick size in order to increase rent seeking.

Smaller and lesser-known companies could benefit from being nickel-and-dimed, at least on stock markets.

Allowing thinly traded stocks to rise or fall in broader increments–five or ten cents versus the current penny, for instance–could help those securities draw more investors and make their shares easier to trade, according to exchange and brokerage executives.

Publicly traded companies or those eyeing an initial public offering should have the ability to choose whether they want their shares to move cent-by-cent or in larger steps, executives told lawmakers at a Wednesday hearing in Washington.

In other cases, exchanges ought to be able to transact the most heavily traded shares in fractions of a cent, some said.

There is a case for having a tick-size function, in which tick sizes would change with share price and perhaps also volume. Many exchanges in the world have such tick functions. I am suspicious, however, when industry insiders plump for higher tick sizes as being in the public interest. In particular, I have doubts that this is true:

Wall Street’s current methods for trading stocks have helped fuel a slide in the number of publicly traded companies, according to David Weild, senior adviser with Grant Thornton LLP. He told lawmakers Wednesday that the number of U.S.-listed companies has declined steadily for the last 15 years, with an average 208 listings falling off exchanges per year since 2002.

The increments by which stocks can be bought or sold, known as their “tick size,” are a key factor, Weild said at the hearing. Trimming the increment to one cent created more potential prices at which shares can trade, making it more work for traders to ensure liquidity, he said.

IPOs and listings are down but I think tick size is at most a minor reason. There are more plausible reasons for declining listings including more competition from abroad, greater use of private equity, increased stringency of regulation in the United States (SOX) and perhaps also declining profitability of small firms.

FYI, here is the testimony from the hearing before the House Financial Services Committee.

Hat tip: John Welborn.


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