What does the 5 cent tick pilot do?


For the first time in the last 15 years, the Securities and Exchange Commission (SEC) is launching a program called: the tick pilot program.This program will test the change in the bid- ask spread of some stocks. If you are not familiar with the tick pilot program, then below is a list of the most important things about it, that might make you understand what it does.

•    It will only impact a few stocks

•    Most probably, the average investor will see no differences in his or her trading portfolio. The tick pilot program consists of 1400 stocks which are split into three test groups along with one control group. The control group consisting of 200 stocks, will continue to trade normally. The stocks that are included in this pilot test are usually extremely thinly-traded. Their market caps are under $3 billion and their average trading volume is lower than 1 million shares.

•    The SEC wants to increase liquidity

•    The main idea behind the tick pilot program is to find out if accelerating the spreads for thinly-traded stocks leads to an improvement of liquidity in the market. According to the SEC, it is possible that for larger spreads to be an incentive for brokers to make markets in these types of stocks.

•    There will be a different impact on each of the three test groups

Besides the 200 stocks from the control group, which will remain intact, the three test groups will start trading under these conditions:

Group 1: all of the stocks will trade in five cent increments, with no exceptions.

Group 2: the stocks will trade in five cent increments, however, “midpoint trading” will be allowed for some exceptions. These exceptions will let orders to be filled at a price situated halfway between the bid and the ask.

Group 3: besides the conditions from group 2, these stocks will also have a “trade at” requirement.

What these all mean is that the spreads for the stocks belonging to these test groups will go from one to five cents, thus the name of the program: 5 cent tick pilot.

The program is very important as it will lead to many changes in the online stock trading. These changes might affect you if the stocks which you trade are in one of the three test groups.If you want to know whether the stocks that you are trading are going to suffer some changes, then check out this list .However, if you are interested in learning more about trading and want to learn some tips and tricks from our experts, or simply want see what is new in online trading, then follow Warrior Trading on Twitter.

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