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.