The SEC has posted the webcasts from its decimalization roundtable.  These are available at:  http://www.sec.gov/news/otherwebcasts/2013/decimalization-roundtable-020513.shtml.  The participants generally supported the implementation of a pilot program, and cited the need for additional empirical data regarding the effect of decimalization as well as order handling and other market structure changes on the securities of smaller and mid-cap companies.

As greater attention is devoted to the role of decimalization and other market structure changes in the decline of smaller company IPOs, we wanted to share this white paper authored by Leslie Seff, http://www.mofo.com/files/Uploads/Images/121124-IPOs-Decimalization-Need-for-Better-Regulation.pdf.  The paper puts into perspective the various regulations that had an effect on market making activity, and recommends a more nuanced approach, including the introduction of a pilot program, compared to those approaches discussed to date that would begin to address some of these market structure issues.

Title I of the JOBS Act mandated that a study be conducted on the impact of decimalization.  This study was delivered earlier in the year, and the SEC announced that it would call for a roundtable to discuss the impact of decimalization and consider alternatives.  The roundtable will be held at the SEC on February 5, and will consist of three panels.  The first panel will consider the impact of tick sizes on small and mid-sized companies, the economic consequences of increasing or decreasing minimum tick sizes, and whether other policy alternatives might better address concerns raised by the JOBS Act.  The second panel will address the impact of tick sizes on the securities market generally.  The third panel will address potential methods for analysis of the issues, including a pilot study.  Electronic or paper submissions may be submitted to the SEC.

The SEC announced that its staff will host a roundtable early next year to discuss the impact of decimal-based stock trading on small and mid-sized companies, market professionals, investors, and U.S. securities markets.  The roundtable will be held on Feb. 5 at the SEC’s Washington, D.C., headquarters, and will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued shortly.  See the release at http://www.sec.gov/news/press/2012/2012-250.htm.

David Weild, Head of Capital Markets at Grant Thornton will be speaking during a Grant Thornton webcast about that same topic. The webcast, “The JOBS Act & tick sizes: Decimalization, public policy & the impact on banks,” will take place on October 25 from 3:00pm-4:30pm ET. The other panelists include Kendra Decker, Partner, SEC-Regulatory Matters at Grant Thornton and Thomas Killian, Principal of Capital Markets at Sandler O’Neill + Partners, L.P.

The webcast proposes that, while several steps have been taken to revive the U.S. IPO market, one key step remains. That step would be to allow higher tick sizes. The objectives of the webcast include the following:

  • Recognizing how the JOBS Act will alter Wall Street “best practices” for going public;
  • Implications of going public vs. staying private and the analysis of cost and impact on banks for specific strategies;
  • Emerging growth company regulations; and
  • The importance of tick sizes to market structure and its impact on banks.

For more information, and to register, please visit the event page.

Former Vice Chairman of NASDAQ, David Weild IV, guest blogs about the importance of tick sizes. David is Head of Capital Markets at Grant Thornton and Founder, Chairman and CEO of Capital Markets Advisory Partners.

Our prior studies served as a call to action that helped focus attention on the plight of capital formation that paved the way for the JOBS Act.   We hope that our (my co-authors are Ed Kim and Lisa Newport) new study, “The trouble with small tick sizes:  Larger tick sizes will bring back capital formation, jobs and investor confidence,” will do more to fix stock markets to better support entrepreneurs, innovation, economic growth, access to capital and job creation.

While many intuitively knew that stock markets were no longer supporting entrepreneurs at they once had, it wasn’t enough to know it, we had to prove it.  So, we set out, with the gracious support of Grant Thornton, the Global Six Audit Tax and Advisory firm, to identify specifically what was causing so the harm to issuers, their access to capital, and in turn, job formation and the U.S. economy.

Our earlier studies (Why are IPOs in the ICU?; Market structure is causing the IPO crisis – and more; and A wake up call for America) (signed into law by President Obama on April 5, 2012) were the first to show:

  • The catastrophic drop in small IPOs (sub $50 million in proceeds) that occurred in 1998.  This is significant because it was BEFORE Decimalization (2001) and BEFORE Sarbanes-Oxley.
  • That the United States listed (NYSE, AMEX and NASDAQ) stock markets have lost listed companies, EVERY single year since the peak in 1997.
  • That we have lost over 43.5% of all listed companies from the US stock markets.

“The trouble with small tick sizes” (“tick sizes” are the smallest increment in which a stock may be quoted – 1 penny in today’s market):

  • Demonstrates that Regulation ATS (Alternative trading systems) in 1998 caused a loss of over 75% of the economic incentive to support small public companies.
  • Calls for The JOBS Act, Part 2  – an increase in tick sizes to better support public companies and to the IPO market.
  • Calls for an “Issuer Bill of Rights” (We believe public company managements deserve better representation, better support for their stocks and better transparency into who is trading their stocks)
  • Reviews the academic literature and the recent SEC Report to Congress on Decimalization, and
  • Documents the many market experts that are joining us in our call for increases in tick sizes – from Academics, to Stock Exchanges and including the Mutual Fund Industry.

On July 20, 2012, the SEC delivered to Congress the report required by Section 106 of the JOBS Act, which directed the SEC to examine the impact of decimalization on IPOs and the impact of this decade-old change on liquidity for small- and mid-cap securities. Section 106 goes on to say that if the SEC determines that securities of emerging growth companies should be quoted or traded using a minimum increment higher than $0.01, then the SEC may, by rule, not later than 180 days following enactment of the JOBS Act, designate a higher minimum increment between $0.01 and $0.10.  It doesn’t look like any such change is coming down the pike based on the Staff’s conclusions and recommendations in the study.

The study notes the observations of the IPO Task Force regarding the changing market structure and economics arising from the shift to decimal stock quotes, which point toward a negative impact on the economic sustainability of sell-side research and the greater emphasis placed on liquid, very large capitalization stocks at the expense of smaller capitalization stocks.  The SEC’s study takes a three-pronged approach to examining the issues: (i) reviewing empirical studies regarding tick size and decimalization; (ii) participation in, and review of materials prepare in connection with, discussions concerning the impact of market structure on small and middle capitalization companies and on IPOs as part of the SEC Advisory Committee on Small and Emerging Companies; and (iii) a survey of tick-size conventions in foreign markets.

Not surprisingly, the Staff concluded that decimalization may have been one of a number of factors that have influenced the IPO market, and that the existing literature did not isolate the effect of decimalization from the many other factors. The Staff also noted that markets have evolved significantly since decimalization was implemented over a decade ago, and that other countries have utilized multiple tick sizes rather than the “one size fits all” approach implemented in theUnited States.  Based on the observations reported in the study, the Staff recommends that the Commission should not proceed with specific rulemaking to increase tick sizes, but should rather consider additional steps that may be needed to determine whether rulemaking should be undertaken, which might include soliciting the views of investors, companies, market professionals, academics and others on the broad topic of decimalization and the impact on IPOs and the markets.  In particular, the study notes the possibility of a roundtable where these issues can be addressed.

While the study does a nice job framing the debate regarding decimalization and its impact on the markets, it doesn’t move the ball forward appreciably in terms of potential for rule changes responding to the debate. We’ll have to wait to see how this all unfolds.