The biggest U.S. stock exchange operators asked regulators for permission to trade 30 securities in price increments of less than 1 cent, an attempt to win back business from private venues including dark pools.
Citigroup Inc. and Freddie Mac are among the 30 securities recommended for inclusion in the pilot program by NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets Inc.
The exchanges told the Securities and Exchange Commission in a letter Friday that they should be allowed to start a six-month pilot test of quoting in half-cent tick sizes for stocks between $1 and $20. Jeromee Johnson, Bats' vice president for market development, confirmed the letter was sent.
Exchanges have lost market share in low-priced stocks such as Citigroup, which accounted for as much as 33% of U.S. trading in a single day last year. This is because 1-cent increments are larger proportions of a low stock price and traders can transact in much smaller ticks on dark pools, which are not subject to all the rules that exchanges enforce. Dark pools do not publicly display quotes.
One-cent increments have "resulted in a publicly displayed quote that is artificially wide for certain lower priced, liquid securities and has caused a detrimental impact to the public price discovery process," the letter said.
A lot of trading activity is happening away from stock exchanges because of a desire to trade "within the spread," that is, between the highest price investors are willing to pay for a security and the lowest price at which they would sell, Joe Mecane, executive vice president of New York-based NYSE Euronext, said at a conference in Phoenix on Friday. The minimum spread for stocks is 1 cent.
Smaller quote increments may cut costs for investors by letting them sell at slightly higher prices and buy at slightly lower prices, the exchanges said. The SEC prohibited quotes of less than 1-cent increments, called "subpenny pricing," for stocks $1 or higher in a rule that took effect in 2007.
Eric Noll, the executive vice president for transaction services at Nasdaq in New York, said at the Phoenix conference that a stock's price should not be the sole criterion for setting an appropriate tick size. It should also depend on "volume characteristics" of the stock's trading, he said.