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.
Any proposals for a more meaningful layman’s synonym for ‘rent-seeking’?
Selfishness? The definition is pretty clear, no? Rent seeking is making money without adding any value to society.
The definition is clear – but the phrase is impotent in a summary when I want to share the article with folks whose last econ book was The Communist Manifesto when they were 17.
Wouldn’t a smaller tick size lead to an increase in the number of cases of Lyme Disease?
Is there any evidence from other stock exchanges regarding changes in price quantum and increasing or decreasing listings, or even evidence of difficulties in making markets?
One important thing to realize is that many market-makers are not particularly sophisticated. They’re able to make a living, often a good one, because wide spreads mean that the gains from offsetting order flow exceed the losses from their information disadvantage. But if you reduce tick sizes, thereby narrowing spreads, they’ll be completely unable to compete and leave the market. I used to work for an options group that did exactly this: tick sizes shrank in equity options, they became uncompetitive, and so they moved to fixed-income options.
I shed no tears for traders who have to close their business because they’re not good enough at it, but there definitely is a trade-off between smaller tick sizes and more liquidity. The more profitable market-making is, the more capital will be allocated to it.
When a trader says the word “liquidity”, I reach for my wallet.
Jamie nails it.
In the bond world, shrinking bid as spreads is an indication of improved liquidity. When the regulation forced the the spread narrower for equities they say it killed liquidity.
There is little doubt that decimalization killed the PCOS and is killing the NYSE. Maybe that is a good thing. Improved efficiency and all that.
The small tick size created a challenge for institutional traders. Big Institutional Player is looking to buy a million shares of PDQ, they put out their order for all to see. Everyone can slip in and buy shares for a penny more than BIP is willing to bid, knowing that there is a floor underneath them. This has lead to the creation of dark pools and the like.