U.S. equities markets are the most transparent and resilient in the world. The process of price discovery—bringing millions of buyers and sellers together in a massive electronic marketplace to determine a fair price—is a great technological and economic achievement of the modern age. And the accessibility of our well-regulated markets to Main Street investors means that prosperity and financial security can be widely shared.
In two major reports—Revitalize: Reigniting America’s Economic Engine and TotalMarkets: Blueprint for a Better Tomorrow—Nasdaq lays out a comprehensive roadmap for reforming the U.S. public equities markets.
Our latest proposal to the SEC, produced with input from a cross section of market participants, outlines a proposal to reform the current ‘one-size-fits-all’ tick regime with an intelligent tick regime that will improve markets and benefit all key stakeholders – investors, public companies and exchange members alike.
Our goal and hope in convening a working group and publishing this report is to advance the debate and spur the Commission to act. The sooner we start, the sooner we can move markets forward.Chuck Mack, VP, Head of US Equities
A tick size is the minimum amount in price a security can move, either upward or downward. The tick size is identical for all traded entities, regardless of market capitalization, volume, or share price. That means a $2 stock has the same tick size as a $2,000 stock. Currently, the minimum tick size for all stocks over $1 is 1 cent.
Many issues plaguing the market today can be traced to the current tick size regime, drawing the ire of investors and issuers. The current tick size structure is sub-optimal for equities of all sizes, as well as for investors:
- Many low-priced stocks are tick-constrained, which creates long quotation queues; thereby slowing fulfillment, creating inefficiencies and diminishing price discovery. A narrower minimum tick would reduce bid-ask spreads, saving investors money and making trading more efficient.
- Many high-priced stocks, due to one-tick-size, see increased investor costs, and do not support price discovery or price stability. It destroys the reward and incentive to post passive liquidity and diminishes price discovery.
In both instances there is less quote competition and price protection, resulting in wider spreads between bid and ask price. This further discourages these activities in a self-reinforcing cycle. Investors and issuers suffer.
Data shows that these problems are getting worse. One contributing factor is the steady decline of stock splits in recent years.
During the decades prior to the 2007-08 credit crisis, splits were common. Today, they are rare, causing many stocks – including some of the most actively-traded market titans – to trade at prices significantly higher than historical norms. In a market with a one-size-fits-all, one-penny minimum increment, more and more stocks are trading at the “wrong” tick size—and suffering the associated inefficiencies.
To address this issue, Nasdaq convened a working group to share and analyze tick data. Representatives from buy-side, sell-side, market makers and retail firms helped us think through what a potential proposal needed to cover. There was rigorous analysis, spirited debate, and ultimately, support for a new intelligent tick regime – a smart and data-driven approach that will create an easy-to-implement table of trading increments to account for the wide variety in size, volume and stock price.
We expect that various market participants, including those who worked with Nasdaq on this proposal, will continue to consider and debate the specific details of an intelligent tick regime. We welcome that conversation and believe strongly that the overwhelming majority will support the concept.