The Future of Tick Sizes: Lessons Learned from the Pilot Program

A Wealth of Data

The Tick Size Pilot Program was one of the most ambitious and comprehensive market structure experiments ever conducted. The wealth of data that it generated has provided regulators and market participants with an unprecedented opportunity to study the impact of tick sizes on the market for small-cap stocks. The lessons learned from the pilot will be invaluable as we continue to work to create a more fair and efficient market for all.

The Good, the Bad, and the Ugly

The pilot had a number of positive effects. It led to larger quote sizes, a deeper market, and a significant reduction in message traffic. These changes made the market for small-cap stocks more stable and transparent. The pilot also provided a valuable lesson in the importance of protecting retail investors, as the retail price improvement exception was a qualified success.

However, the pilot also had a number of negative effects. It led to an increase in intraday volatility and a decrease in the efficiency of the price discovery process. It also accelerated the consolidation of market making in the hands of a few large, sophisticated firms. These are serious concerns, and they highlight the fact that there are no easy solutions to complex market structure problems.

The Path Forward: A More Nuanced Approach

The experience of the pilot suggests that a one-size-fits-all approach to tick sizes is not the answer. The optimal tick size for a given stock depends on a wide range of factors, including its price, its liquidity, and its trading characteristics. A more nuanced and data-driven approach is needed.

One potential path forward is to adopt a more dynamic and flexible approach to tick sizes. For example, the tick size for a given stock could be adjusted based on its trading characteristics. A stock that is very liquid and has a high trading volume could have a smaller tick size, while a stock that is less liquid and has a low trading volume could have a larger tick size. This would allow the market to find the optimal tick size for each individual stock, rather than imposing a one-size-fits-all solution.

Another potential path forward is to focus on other areas of market structure reform. The pilot has shown that tick sizes are just one piece of the puzzle. There are a number of other factors that can have a significant impact on the market for small-cap stocks, including the rules governing order routing, the role of wholesalers, and the regulation of dark pools. A more holistic approach that addresses all of these issues is needed.

Conclusion: A Never-Ending Journey

The Tick Size Pilot Program was a valuable experiment, but it was not the end of the journey. The quest for a more fair and efficient market is a never-ending one. The lessons learned from the pilot will be invaluable as we continue to work to create a market that is not only stable and transparent but also efficient and accessible to all. The path forward will require a more nuanced, data-driven, and holistic approach to market structure reform. It will not be easy, but it is a journey that we must continue to take.