Submission by David Weild, Senior Advisor — Grant Thornton LLP

 
 
 
 
 
 
SEC Roundtable on 
Decimalization 
Submission by David Weild, Senior Advisor — Grant Thornton LLP 
This submission refers to File Number 4-657 and is being sent to 
[email protected]. It responds to all questions posed to all panels 
for the Roundtable on Decimalization that will be held on February 5, 2013 
at the Securities & Exchange Commission in Washington, D.C. 

 
 
  
 
 
  
 
 
 
 1 SEC Roundtable on Decimalization | Feb. 5, 2013
Panel 1 — Evaluating Concerns Relating to 
Tick Size for Small and Middle Capitalization 
Companies 
Given the current market structure, does a one-cent minimum tick size inhibit IPOs or 
otherwise have any negative effects on small and middle capitalization companies? 
	 Yes. One-cent tick sizes (and the associated loss of economic incentives to support small cap 
companies) inhibit IPOs by compromising the breadth of institutional and retail equity distribution 
required to market and sustain visibility and liquidity in small cap stocks in the aftermarket. If stocks 
are not supported in the aftermarket (once they go public), then stock prices fall and IPO windows 
close. One-cent minimum tick sizes are part of a broader family of problems that have removed 
economic incentives from the value providers (sell-side firms that provided equity research, sales and 
capital commitment) as opposed to the execution-only firms. Similarly, economic incentives were lost 
for the value providers through the shrinkage in retail brokerage commissions due to the rise of self-
directed brokerage (although it is not clear that consumers benefited from the shrinkage in brokerage 
commissions since 1) transaction costs may have simply shifted to models that charge based on assets 
under management, 2) while economic growth has declined creating a long-term drag on investor 
returns, and 3) institutional liquidity in small cap stocks has declined). 
Are there other economic or regulatory developments during the timeframe that 
decimalization has been in place that may have had a more significant impact on 
U.S. IPOs?  
	 The shift from a quote-based market to an electronic order-based market (due to Regulation ATS in 
1998) destroyed the economic incentive from as much as 25 cents per share to the minimum tick size 
of 3.125 cents. It is not coincidental that the small (sub-$50 million) IPO immediately declined as a 
percent of total IPOs and has never recovered. See Figure 1.  
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Figure 1: Small IPOs (< $50 million) today represent less than 20% of all IPOs. 
	 “Decimalization” is in one instance the shift in 2001to one-cent trading increments. However, 
popularly it is used to refer to the loss of economic incentives to market and attract investors to 
otherwise illiquid and unknown stocks which make up the vast majority of public companies. So, in 
the aggregate, the loss of economic incentives was driven primarily by the tripartite changes of the 
Order Handling Rules (1997), Regulation ATS (1998) and the dawn of low-tick-size electronic 
markets, and culminated with Decimalization (2001). The loss of economics to the value providers 
was in turn exacerbated by permitted kickback practices (e.g., payment for order flow, rebates and 
execution within the minimum allowable tick size) and the disintermediation that ensued when the 
self-directed low-cost brokerage models (e.g. E*Trade, Schwab, Ameritrade, TD Waterhouse, Datek, 
Fidelity Brokerage) emerged and caused traditional high-touch models to abandon commission-based 
brokerage in favor of charging consumers a percentage of assets under management. Ironically, 
consumers and pension funds may not be experiencing lower fees. As one pension fund has 
commented to us, long-term growth has been adversely affected, and fees to consumers and pension 
funds have not decreased but instead have changed form: Consumers are now charged wrap fees, 
pension funds are charged “2% plus 20% fees,” and more commissions are incurred in smaller 
amounts through higher trading activity. “Fees have simply migrated from the sell-side over to the 
buy-side and shifted the market’s focus from investment to trading — everyone is worse off.” 
What are possible regulatory initiatives that might encourage small and middle 
capitalization companies to conduct IPOs? 
	 First and foremost, the SEC needs to increase incentives for the value providers to invest in reaching 
more investors and creating order flow in small cap stocks in the aftermarket through the addition of 
research, sales and capital to support liquidity. At the same time, the SEC should create disincentives 
for the buy-side to seek executions that compete on cost-of-execution alone. For example, kickback 
practices (e.g., payment for order flow, rebates and executions within the tick size) should be 
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 3 SEC Roundtable on Decimalization | Feb. 5, 2013
prohibited and competition should be based uniquely on service, capital commitment to support 
liquidity and the competition of ideas — all essential to the proper functioning of small cap markets 
and largely made extinct by current market structure. 
Will the provisions of Title I of the JOBS Act that provide additional flexibility to small 
and middle capitalization companies with respect to disclosure obligations, internal 
controls, auditing standards, research reports and other matters encourage these 
companies to conduct IPOs? If so, how much? 
	 We are very pessimistic that the provisions of Title I alone will bring back the IPO market to the 
levels that existed in the early ‘90s and ‘80s (400-500 IPOs/year) vs. the 2000s (126 IPOs/year). While 
cost is important to issuers, the data clearly shows that the small IPO market was gutted in 1998 
following the Order Handling Rules and Reg. ATS. Note that Sarbanes-Oxley didn’t come into 
existence until 2002 when the IPO market had already collapsed. See Figure 2. 
Figure 2: The IPO market has never recovered from the New Order Handling Rules and Regulation ATS. 
	 The data is quite striking and the public record shows that practitioners repeatedly warned the SEC 
that the Order Handling Rules, Reg. ATS and Decimalization would harm capital formation. 
Unfortunately, such warnings were dismissed at the time, and the SEC chose to pursue regulations 
benefiting the low-cost trading by consumers. We believe that SEC regulations that resulted in smaller 
tick sizes were a mistake that has cost consumers and the economy upwards of 10 million jobs. The 
SEC now has a great opportunity to fix this mistake. 
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 4 SEC Roundtable on Decimalization | Feb. 5, 2013
Would increasing minimum tick sizes for trading the securities of small and middle 
capitalization companies materially impact the incentives for IPOs? If so, what 
should the minimum tick size be? 
	 Yes. But the increase in incentives needs to meet two criteria:  1) It has to create meaningful economic 
opportunity for the value providers (sell-side firms providing research, sales and capital commitment 
to individual stocks) to invest in creating investor order flow, and 2) The SEC must ensure that trade-
only execution venues can’t siphon off that flow by competing on price alone through kickbacks 
(payment for order flow, rebates, executions within the minimum tick increment, etc.). 
	 Minimum tick sizes should vary according to the liquidity attributes of the individual stock. Less liquid 
stocks on average will require much higher tick sizes (as much as 25 cents in the extreme situation of 
sub-$100 million market value companies) and larger stocks may do well by 1 cent increments (e.g., 
most S&P 500 stocks). In fact, some academics (including Professor James Angel of Georgetown) 
have argued that large, innately liquid stocks would be made even more liquid by sub-penny tick sizes. 
We agree, but we caution that the associated gaming and quote flickering that smaller tick sizes invites 
is likely to undermine investor confidence and that there is a case to be made to increase tick sizes 
even for large cap stocks if only to simplify markets and restore investor confidence. 
	 We believe that issuers should be given a choice of tick sizes (“Let the market decide.”) rather than 
have regulators substitute their judgment. We believe that all issuers should be given a choice of 
1-cent, 2-cent, 5-cent, 10-cent or 25-cent tick size increments. An “Issuer Choice” model would 
provide an era of mass customization of micro-markets (which would create optimal markets by 
accommodating the full diversity of company sizes and industry factors, including volatility and 
availability of equity research). Consultants would evolve to advise boards. We would very quickly see 
data line up that would define the optimum tick size. Issuers would receive input (solicited and 
unsolicited) from their investors and their value providers. A picture of the optimum tick size would 
emerge. 
	 Alternatively, we could set tick sizes algorithmically. We could have them set to 1 or 2 ticks per 
minimum quoted spread over some period of time. Quoted spreads today are generally much larger 
than 1 cent (even for large cap stocks). However, because it only costs 1 cent to step in front of an 
order, larger spreads are not “bankable” (monetizeable) by the value providers. The lack of a reliable 
economic model for the sell-side impedes investment in research, distribution and the commitment of 
capital to improve liquidity. 
Can issuers effectively address the tick size issue through reverse stock splits or 
stock price range selection at the time of the IPO? 
	 Issuers cannot in most instances effectively address the tick size issue (economic incentive issue) 
through stock splits or price range adjustment. There are two reasons that stock splits won’t work. As 
an example, we will refer to the case of a micro-cap (sub-$500 million and smaller market value 
stocks). (Note: We assume this question meant to say “stock splits” which decrease the share price 
and increase the tick as a percentage of share price and thus the incentive and not “reverse stock 
splits” which increase share prices and thus decrease the tick incentive as a percentage of share price.) 
The first reason that stock splits won’t work is that most micro-cap stocks probably need a 5-cent, 
10-cent or 25-cent tick. Most of these stocks may trade in the $10 to $20 per share price range. So, if 
we split these stocks 5:1 (to create the economics of a 5-cent tick size) we end up with share prices of 
$2-$4, which could cause delisting, loss of margin and other concerns. Tick sizes of 10 cents would 
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 5 SEC Roundtable on Decimalization | Feb. 5, 2013
require stock prices in the $1 and $2 range. Tick sizes of 25 cents would require stock prices that 
automatically delist securities.  
The second reason is that until the SEC ends kickback practices (e.g., payment for order flow, which 
we understand started with Bernie Madoff), rebates and trade executions within the minimum tick 
increment, tick economics will be porous and may not create the incentive that was intended. 
Should minimum tick sizes remain at a specific level only for a certain period after 
the IPO of small and middle capitalization companies? If so, what period would be 
necessary? 
	 Minimum tick sizes should exist as long as the company trades. That said, the minimum tick size 
could be reset periodically — perhaps quarterly or semiannually like major market indices — to reflect 
changes in the underlying liquidity and “ecosystem” supporting the market for the stock. As a 
company grows and more shares are put into the public float, it may determine that a lower tick size is 
in order. It should have the right to choose both larger and smaller tick sizes. Market forces will lead 
issuers to the optimal choice and a picture will emerge. 
What particular problems do small and middle capitalization companies face in the 
current market structure? 
	 The key problem confronting small cap companies is a lack of marketing (redistribution) of their 
shares. Small-cap, micro-cap, nano-cap and, to a lesser extent, mid-cap stocks can have what 
academics call “Asymmetrical order books,” which is the state where there are buyers but not sellers, 
or sellers but no buyers. Historically, that problem was engineered around by what stock exchange 
executives call a “Call market” — where liquidity is aggregated at one or more points during the day 
as opposed to today’s so-called “Continuous markets.” Continuous markets for stocks that trade 
infrequently don’t work very well unless there is an incentive for someone to step in the middle, 
commit capital, provide research and make sales calls. Those incentives were destroyed as a result of 
the regulatory changes between 1997 and 2001, and as a result, liquidity and visibility support for 
stocks has been breaking down, starting with the smallest and moving up market. As the ecosystem 
continues to erode from this so-called “flesh-eating bacteria of tiny tick sizes (and loss of other 
economic incentives)” larger and larger stocks will begin to lose their support. 
	 Contrast today’s electronic 1-cent tick size market with the old higher commission, quarter-point 
quoted spread markets. The old market structure created economic incentives for firms to maintain 
research coverage, make sales calls to a wide variety of retail and institutional investors, and commit 
capital. Today, almost all capital has been taken off of trading desks. As a result of the loss of critical 
economic incentives, so-called “Middle market institutional sales groups” were closed, and the sales 
coverage of the smallest institutional investors by retail brokers was lost. Even if research coverage 
can be found, very little of it is actively marketed to small- and mid-cap long-term investors because 
they cannot properly incentivize Wall Street to pay attention. Over the past decade the system has 
broken down, but the SEC now has an opportunity to be part of a process to rebuild the U.S. capital 
markets. 
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Is the level of liquidity provided for securities of small and middle capitalization 
companies inadequate today? If so, to what extent has this problem been 
exacerbated by smaller tick sizes? 
	 Yes. Absolutely, the level of liquidity has been breaking down. It is acute for the smallest stocks. Why?  
Because only large stocks have enough investors following them at any point in time to ensure a 
naturally liquid market where buyers and sellers interact. Please refer to the testimony of Kevin 
Cronin, who represented the Investment Company Institute on June 20 in the House of 
Representatives, and Andy Brooks of T. Rowe Price in the Senate on September 20. Long-term 
institutional investors in smaller cap stocks all understand that the ecosystem is in peril and that 
institutional liquidity has been compromised. There are increasing calls by institutional investors to 
increase tick sizes and improve the economic incentives to provide liquidity in stocks that are not 
naturally liquid. 
Are there other factors that significantly impact the liquidity and trading of small and 
middle capitalization companies? If so, what are possible regulatory solutions to 
improve the market structure for them? 
	 The key factor impacting liquidity is the economic incentives (or lack thereof) for the liquidity 
providers in small-cap stocks to support and reach long-term investors. Economic incentives may take 
a variety of forms: 
 Regulated commissions (ended on May 1, 1975, with the deregulation of commission structures). 
 Quoted markets (as opposed to electronic markets). Quoted markets permit risk management by 
dealers who are not obligated to take a trade.
 
 Higher tick sizes. 

	 Economic incentives to provide support services for stocks are undermined when the price of the 
execution becomes the primary determinant of order flows. There are a litany of practices that may 
undermine value-added support services and erode the small cap ecosystem, including:   
 Payment for order flow 
 Commission sharing, rebates, etc. 
 Electronic order books 
 Proliferation of tick sizes (smaller and smaller tick sizes) 
 Trading within the tick size 
 Best execution (the definition overly relies on commissions) 
 Rankings and Reporting of fund expense ratios (as opposed to absolute and relative return) 
Would increasing minimum tick sizes for trading the securities of small and middle 
capitalization companies improve their market structure by enhancing economic 
incentives for market making? 
	 Yes, increasing minimum tick sizes will improve market structure for small stocks, but only if you also 
plug the economic leakage/kickbacks that could subvert the intent of changes in tick sizes, including  
payment for order flow, commission sharing, rebates, and trading within the tick size. The market 
should be first-come, first-served (time and price priority with higher tick sizes would increase 
investor confidence — it is inherently fair), and participants should be encouraged to compete on 
service and not simply on price. Liquidity provision is a service. Research is a service. Sales is a 
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service. The current market structure has focused on relentless price competition, which only works 
for large-scale liquid stocks but is a disaster for the vast majority of issuers who require service 
support — liquidity, research and sales — to trade successfully on public markets. 
Would increasing tick size improve the availability of research on small and middle 
capitalization companies? 
	 Again, yes it will, if the economics follow to the firms that provide the research, sales and capital 
support. However, the SEC must ensure that strategies that compete on price alone cannot 
disintermediate the value providers. Please note that the smallest stocks will still be illiquid and one 
might argue that they probably should not be public. That said, there is no reason why — with the 
right stock market structure optimized for smaller issues — that a $25 million IPO can’t be successful 
and supported in the aftermarket. However, it will take the rebuilding of the small broker dealer 
community that has been largely starved out of supplying research, sales and capital support to small 
companies. See Figure 3. 
Figure 3: $25 million IPOs have virtually disappeared, as the economics no longer exist for the value 
providers to support these stocks in the aftermarket. 
From the perspective of investors, would the potential benefits of increased liquidity 
outweigh the potential reduction in price competition? 
	 The benefits of increased liquidity absolutely outweigh the potential for reduction in price 
competition. Today’s market structure: 
 Caters to traders who front-run investors. 
 Undermines investor confidence by adding to quote flickering and the appearance of price 
volatility. 
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 8 SEC Roundtable on Decimalization | Feb. 5, 2013
 Undermines capital formation and job growth, and exacerbates unemployment. 
 Drives down the potential for investment returns by undermining economic growth (investment 
returns are ultimately tied to the rate of economic growth). 
Is the impact different for institutional and retail investors? 
	 Institutional and retail investors have been fleeing small cap stocks, but for different reasons. For 
institutions, it is the loss of liquidity. The largest institutional investors have been cutting their 
allocations to the smaller stocks because of this loss of liquidity. There is a saying that “stocks are 
sold, they’re not bought,” and this is particularly the case with retail investors and small-cap stocks 
(non-household names). With the gutting of economic incentives for value providers to market stocks 
to retail, retail investors have been deprived of exposure to individual stocks. While the original 
intention of the SEC may have been to eliminate sales practice abuses by eliminating sales incentives, 
the unintended harm to the economy is now clear. By increasing sales incentives, the SEC and 
FINRA will have to ensure that rules protecting consumers are enforced. 
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 9 SEC Roundtable on Decimalization | Feb. 5, 2013
Panel 2 — Evaluating Concerns Relating to 

Tick Size for the Securities Market Generally 

What impact has decimalization had on the securities market in general? 
	 Decimalization has depressed the IPO market, led to a decline in the number of listed companies (a 
loss of 44% of listed companies since the peak in 1997), compromised U.S. economic growth, 
undermined investment returns and added to unemployment. It has also likely undermined retail 
investor confidence due to casino-like trading, quote flickering and stepping-ahead (cat and mouse) 
practices pursued by certain computer-based strategies. 
	 Decimalization (broadly defined to encompass the Order Handling Rules, Reg. ATS, Decimalization 
and Reg. NMS) has set the U.S. stock market into a long-term secular decline. 
What problems has decimalization caused? What benefits have been realized? Do the 
benefits of decimalization outweigh any such problems? 
	 Consumers and institutional investors have had their costs decreased in the trading of large cap stocks 
and these stocks tend to trade continuously even during crises. This is a benefit. But one could say 
that there isn’t that great a benefit in making already-liquid stocks more liquid when the cost is making 
already-illiquid stocks more illiquid. 
	 The cost of applying this one-size-fits-all, penny-tick-size electronic market structure to small cap 
stocks is the collapse of the U.S. capital markets — our country’s economic growth engine. The SEC 
now has an opportunity to re-establish the U.S. capital markets as the envy of the world. 
	 The benefits of decimalization do not outweigh the undermining of U.S. competitiveness and 
economic growth that has ensued. We should have capital markets that work effectively for both large 
and small-cap stocks. Changes can be made that retain most of the benefits of decimalization while 
correcting its corrosive effects on small cap stocks. One-size-fits-all rules cannot work for all sized 
stocks. We must never again lose sight of the need to balance the needs of all constituents, including 
institutional investors, issuers and the value-providing dealers specializing in research, sales and 
liquidity support for small cap companies. 
Is it advisable to broadly re-evaluate minimum tick sizes in the U.S. securities 
market?  
	 It would be a dereliction of public trust not to re-evaluate minimum tick sizes and fix our stock 
markets so that they work for all participants and help to restore growth in the U.S. economy. 
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Should consideration be given to reducing minimum tick sizes for other types of 
securities such as those of very liquid large capitalization companies? 
	 The marginal value of decreasing tick sizes in large cap stocks is that we make liquid stocks more 
liquid at the expense of possibly undermining retail and consumer confidence since it will usher in 
more gaming strategies. If the SEC wants to improve investor confidence, one way is to cut 
complexity. Fewer price points (higher tick sizes) is one way to cut complexity (and cut down on the 
gaming of investors). From a public policy perspective, the SEC should consider allowing large cap 
companies to increase tick sizes within a narrow range (say 1-5 cents). We don’t embrace the idea of 
the SEC setting tick sizes, unless it is through some governance structure that includes the value 
providers, relevant investors and the issuers. We think that allowing all issuers to choose their own 
tick size will give issuers a seat back at the table and force them to understand the impact of market 
structure on cost of capital. This would, we believe, create a beneficial dialogue, restore balance and 
lead to a renaissance in capital formation, job growth and long-term investment returns. Issuers will 
choose to cater their choice to needs of investors and not to short-term traders. As a result, choice of 
tick sizes could do much to bring America back to the basics of fundamental investing. 
What should be the factors in determining optimal minimum tick sizes? 
	 Tick sizes should be related to: 
 The natural liquidity (measured as the dollar volume of transactions in the course of a day) in the 
stock. 

 The level of research 

 The availability and need for capital to support liquidity. 

	 Higher tick sizes will increase all of the above assuming that it is not subverted by kickbacks (payment 
for order flow, trading within the tick, rebates, etc.). 
Should the minimum tick size vary with the price of a security, its liquidity, the size of 
the issuer, or other characteristics? 
	 The market (Issuer’s Choice) should determine tick sizes within a range of choices, say: 
 1 cent 
 2 cents 
 5 cents 
 10 cents 
 25 cents 
	 “Share price,” which is the standard that most foreign markets use to vary tick sizes, is archaic and 
largely irrelevant (issuers can split their share prices to arrive at the appropriate ratio for their stock if 
enough variety in tick-size choice is established). 
	 Tick size (and other economic incentives such as commissions) can pay for required support services 
that keep a stock visible (e.g., research and sales) and liquid (e.g., capital). The key determinants for 
any issuer will thus be: 
 The level of liquidity for fundamentally oriented long-term institutional investors in the stock (not 
to be confused with volume),  

 The level of sell-side equity research coverage, and 

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	 The level of stability and fairness that they wish to project (higher tick sizes will project a higher 
level of price stability and limit the perception by individual investors that they are being “gamed” 
by algorithmic and high-frequency traders). 
Are there international models that might provide a good example of tiered minimum 
tick sizes?  
	 No. All of the international models that we are aware of vary tick size by share price and the tick size 
increments are too small to attract the needed levels of sponsorship. However, we believe that new 
tick-size regimes will emerge internationally as we have been contacted by a number of non-U.S. stock 
exchanges and at least one non-U.S. regulator. 
Should the minimum tick size be mandated for all securities, or should issuers or 
primary listing markets be allowed to choose? 
	 Minimum tick sizes should not be mandated for all securities. The SEC has neither the ability nor the 
budget to consider all the factors that an issuer would consider. 
	 Minimum tick sizes should not be chosen by primary listing markets. As for-profit trading-
dependent entities, they are likely to be conflicted, and their interests will be at odds with the needs of 
issuers. 
	 Minimum tick sizes should be chosen by issuers, with the input of their investors and investment 
banks. Let the market decide! The fact is that markets change and the availability of support for 
issuers changes over time. The imposition of an outside or one-size-fits-all standard on issuers is what 
caused the problem of one-size-fits-all stock markets in the first place. 
	 Note – America will be better off for “Issuer-choice” of tick sizes, and issuers will be up to 
the task of making informed choices as consulting reports from listed exchanges, investment 
banks and third-party consultants become available. A clear picture of optimal tick sizes will 
emerge from a market-based solution. 
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Panel 3 — Studying the Effects of Alternative 
Tick Sizes 
What is the best way to study the effects of decimalization on small and middle 
capitalization companies? 
	 Understand that this problem was caused by 15 years’ worth of erosion in the ecosystem of sell-side 
sales, research and capital providers. Rebuilding that ecosystem will take permanence in any solution. 
So our view is that the SEC should simply effect a wholesale and permanent change allowing a range 
of choices in tick sizes for all public companies (e.g. 1 cent, 2 cents, 5 cents, 10 cents and 25 cents).  
	 We believe that the root problem was the tripartite combination of the Order Handling Rules, 
Reg. ATS and Decimalization. We can see no evidence that the effects of the Order Handling 
Rules and Regulation ATS were ever part of a pilot program, and even if they had been, such 
a study — unless it were long-term in nature — could not have uncovered the long-term 
impact on the support of small cap stocks, Wall Street distribution, sell-side equity research 
and institutional investor avoidance of smaller companies due to lack of liquidity. 
	 So we believe that any study needs to be: 
 Widespread (500 or more public companies). 
 Representative of all market cap strata (nano-, micro- , small- and mid-cap). 
 Long-term (five years). 
 Terminated early only where it is apparent that there are benefits and that the terms (higher tick 
sizes) should  be extended to all issuers. 

 Allow all IPO candidates to elect into higher tick sizes.
 
 Prohibit “kickback” practices (payment for order flow, rebates, trading within the tick, etc.).
 
Is it feasible to isolate the impact of decimalization on IPOs? If so, how? 
	 Not adequately. The ecosystem of equity research support, broad distribution (sales) support and 
capital commitment will need to be rebuilt, and that will take time. Most pilot studies will measure 
short-term effects. Long-term, when the ecosystem does come back, it will cause the following effects: 
 More capital will be brought to smaller public companies. 
 Share prices will perform better. 
 More companies will be attracted to the IPO market because the aftermarket will sustain higher 
share prices and thus a lower cost of capital.
 
 Higher rates of investment in private companies will occur as investors in private companies 

become more confident of the IPO market as an exit path.
 
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 U.S. economic and job growth will improve. 
 More IPOs will be successes for issuers, rather than the failures that the majority of them have 
been. See Figure 4. 
Figure 4: IPO success rates have been declining even as company sizes have increased. We believe this 
is due to changes in market structure (Order Handling Rules, Reg. ATS and Decimalization). 
What data would be needed to support changing the minimum tick size for all or a 
subset of stocks? 
	 We believe that no additional data is needed. The evidence of erosion in small cap stocks due to a lack 
of adequate economic incentives is overwhelming. 
	 Any pilot of higher tick sizes will likely show the reverse effects of the studies that measured the 
impact of decimalization when it was implemented in 2001. Studies show that there was a 
proliferation of price points and a loss of order depth. 
	 By increasing tick sizes (and plugging “Kickback” schemes that undermine the intent) we would 
expect to see: 
 Fewer price points. 
 Higher visible order depth. 
	 We would encourage the SEC to survey sell-side firms specializing in the support of small-cap and 
micro-cap stocks (e.g. Cowen, Piper Jaffray, William Blair, and Sandler O’Neill) on how it could be 
expected to affect their interest/ability to support small cap stocks. 
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	 We would encourage the SEC to survey buy-side investors (both portfolio managers and traders, 
including firms like T.Rowe Price, Wasatch Advisors and Emerald Asset Management) on how it has 
impacted their interest in small-cap and micro-cap stocks. 
How can the Commission or exchanges generate additional studies of the impact of 
minimum tick sizes on the liquidity and trading of securities of small and middle 
capitalization companies? Is this best done through a pilot program in which the 
minimum tick size is actually changed for a control group of securities? If so, how 
should such a pilot program be designed? 
	 We believe this is best done by letting the market decide and going to a “permanent” and market-wide 
Issuer-Choice model. The concern we have with a pilot is that it isn’t permanent: 
 What ecosystem providers (research, sales and capital providers) will make long-term hiring 
decisions based on something that is possibly temporary? 

 What institutional investors will change their investment strategy on the basis of a potentially 

temporary structural change? 

	 The solution itself will be its own pilot. The SEC can always revisit it if the data that emerges dictates 
any sort of course correction. 
Should the Commission assess the impact of minimum tick sizes on the full range of 
equity securities, including those of large capitalization companies? 
	 Yes. The evidence is clear from the work of micromarkets economists that smaller tick sizes make 
naturally liquid (mostly large cap) stocks more liquid; and larger tick sizes make naturally illiquid 
(mostly small- and micro-cap) stocks more liquid. However, we believe that the marginal value of 
increased liquidity in sub-penny tick sizes for large cap stocks is far outweighed by the loss of 
confidence that could ensue from smaller tick sizes. We believe that larger tick sizes, even in large cap 
stocks, would improve investor confidence by: 
 Increasing the perception of price stability (cuts quote flickering). 
 Cutting cat-and-mouse (stepping in front) behaviors. 
 Moving volume into the “lit” markets and out of the “dark” (dark pool) markets. 
Should OTC executions in increments less than the minimum tick size (i.e., subpenny 
price improvement) be prohibited during a pilot period? 
	 Yes, OTC executions in increments less than the minimum tick size should be prohibited. Any 
executions that subvert the integrity of the intended increase in tick economics will undermine the 
economic incentives to support less liquid stocks. Sanctioned kickback structures of all stripes should 
be prohibited, including executions in increments less than the minimum tick size, payment for order 
flow and other forms of economic rebate. We also believe that by creating one set of rules with clear, 
simple definitions, the Commission will give individual investors greater confidence in the market 
(everyone is treated the same), and some liquidity will shift from the dark markets to the lit markets 
which will foster greater transparency in markets. 
What criteria should be used to select securities for participation in a pilot? 
	 We believe that, instead of a pilot program, a choice of tick sizes should be implemented across the 
entire market. However, if there were to be a pilot, there should be an effort to create a “pairs 
© 2013 Grant Thornton LLP. All rights reserved. 

 
 
 
 
 
 
 
  
   
 
 
 
  
 
 
 
 
   
 
 
  
 
 
 
  
 
 
 
                                                                                                                15                                                                                                                SEC Roundtable on Decimalization | Feb. 5, 2013
matched control group of 500-plus stocks that are in the pilot with another 500-plus stocks not in the 

pilot.”  They should be matched for:
 
 Industry 

 Size (a selection of nano-cap, micro-cap, small-cap and mid-cap stocks) 

 Level of liquidity (not volume) 

 Level of sell-side research coverage 

What minimum tick sizes should be used for a pilot program, and to which types of 
securities should they apply? 
	 We prefer a limited number of tick sizes to test a broad range of outcomes, but not so many different 
tick sizes that it becomes overwhelming to this process. We would prefer tick sizes that make the 
math easy. We would urge the following choices: 
 25 cents (nano-cap — sub-$100 million market value stocks — may need to be quite large, given 
their innately illiquid nature) 

 10 cents
 
 5 cents (might be interesting even to large cap stocks to cut gaming) 

 2 cents (might be interesting even to large cap stocks to cut gaming) 

 1 cent 

To what extent should issuers have input into the participation of their securities in 
the pilot? How long should a pilot program last? What are the most useful research 
questions that could be examined from such a pilot program? 
	 We believe that there is a strong rationale to dispense with a pilot and simply let all issuers decide for 
themselves what their tick size should be from a narrow range of options (1 cent, 2 cents, 5 cents, 
10 cents, 25 cents). However, if the SEC insists on running a pilot (which could not possibly 
demonstrate a reversal of the damage to the ecosystem that was caused by Decimalization), then it 
might be impractical to let issuers choose/give input and achieve the quality of data (pairs 
comparisons) desired by a study of this type. 
Is public data sufficient for addressing these questions in the context of a pilot? If 
not, what questions cannot be addressed with public data and what additional data 
would be needed to address these questions?  
	 It will be important to survey sell-side small-cap specialist firms for how they believe such changes, if 
made permanent, would impact how they look at their sales departments (breadth of institutional 
coverage), research departments (willingness to cover small cap stocks), and their appetite to commit 
and add capital to support institutional trading. 
	 It will be important to survey buy-side small-cap specialist firms for how permanent changes might 
affect the level of investment interest in small-cap stocks. 
Who is likely to study and to provide analysis of a tick size pilot (e.g. academics, 
exchanges, industry groups, others)? 
 The primary analysis will come from: 
 Micromarkets economists in the United States and abroad (there is quite a bit of interest in this 
subject in Europe). 
© 2013 Grant Thornton LLP. All rights reserved. 

 
 
 
 
  
  
  
 
  
 
 
 
  
 
  
  
 
  
  
 
 
 
 
                                                                                                                16                                                                                                                SEC Roundtable on Decimalization | Feb. 5, 2013
 Stock exchanges. 
 Groups that have historically funded analysis to protect their interests (these might include HFTs 
and Dark Pools, for example). 
Are there particular risks associated with conducting a pilot program? If so, what is 
the best way to mitigate these risks? 
	 The primary risk is that economic kickback schemes (trading within the tick size, payment for order 
flow, rebates, etc.) would undermine the integrity of any pilot program. The SEC must promulgate 
and implement a set of rules that prohibit all such practices as part of any pilot (or full 
implementation). 
What are the costs associated with a pilot and how does the design of a pilot affect 
those costs? 
	 Other entities — such as sell-side firms — are better suited to discuss the cost. However, at a dinner 
on September 6, 2011, where we first suggested the idea of higher tick sizes to a broad cross-section 
of Wall Street sell-side, former stock exchange and other personnel, the immediate consensus was 
that: 
 Higher tick sizes would be simple to implement. 
 Higher tick sizes would retain the broader market structure (e.g., not require an exemption from 
Reg. NMS) and thus would be very cost effective for the industry to implement. 
 Higher tick sizes would lead to improvements in liquidity, capital formation and economic growth. 
Are there better ways to gather reliable data on the impact of minimum tick sizes on 
the securities of small and middle capitalization issuers? 
	 We would recommend a review of the global micromarkets economic literature, which we believe 
clearly shows that higher tick sizes will result in improved liquidity for naturally illiquid stocks. See 
also “The trouble with small tick sizes” by David Weild, Ed Kim and Lisa Newport, which was 
published by Grant Thornton in September 2012. 
© 2013 Grant Thornton LLP. All rights reserved. 

 
 
  
  
 
 
 
 
 
 
  
                                                                                                                17                                                                                                                SEC Roundtable on Decimalization | Feb. 5, 2013
Additional materials 

June 8, 2012, presentation to SEC’s Advisory Committee on Small and Emerging Companies 
June 20, 2012, testimony to the House Financial Services Committee, Subcommittee on Capital Markets 
September 7, 2012, presentation to the SEC’s Advisory Committee on Small and Emerging Companies 
Why are IPOs in the ICU? 
Market structure is causing the IPO crisis — and more 
A wake-up call for America 
The trouble with small tick sizes:  Larger tick sizes will bring back capital formation, jobs and 
investor confidence 
Wall Street Journal OpEd entitled, “How to revive small-cap IPOs,” October 27, 2011 
© 2013 Grant Thornton LLP. All rights reserved. 

 
 
 
 
 
 
 
 
 
 
SEC Roundtable on Decimalization | Feb. 5, 2013                                                                                                                18                                                                                                                
About David Weild 

David Weild is a Senior Advisor to Grant Thornton LLP’s Capital Markets Group, which provides strategies 
and insights into today’s global capital markets. 
Experience 
David is the Chairman & CEO of Weild & Co. (formerly Capital Markets Advisory Partners) and the former 
vice-chairman and executive vice-president of The NASDAQ Stock Market, with oversight of the more than 
4,000 listed companies. Prior to NASDAQ, he spent 14 years at Prudential Securities in a number of senior 
management roles, including president of eCommerce, head of corporate finance, head of technology 
investment banking and head of equity capital markets in New York, London and Tokyo. He worked on 
more than 1,000 IPOs, follow-on offerings and convertible transactions and was an innovator of new issue 
systems and securities underwriting structures, including the use of Form S-3s to mitigate risk for small 
capitalization companies raising equity and convertible debt capital. He created the Market Intelligence Desk 
— or “MID” — while at NASDAQ to support issuers in their quest to better understand what was 
impacting trading in their stocks. 
Education 
David holds an MBA from the Stern School of Business and a BA from Wesleyan University. He has studied 
on exchange at The Sorbonne, Ecole des Haute Etudes Commerciales and The Stockholm School of 
Economics. 
Industry participation 
David has participated in the NYSE’s and National Venture Capital Association’s Blue Ribbon Regional Task 
Force to explore ways to help restore a vibrant IPO market and keep innovation flourishing in the United 
States, and is Chairman of  the International Stock Exchange Executives Emeriti (ISEEE) Small Business 
Financing Crisis Task Force. He served as Director of the National Investor Relations Institute’s New York 
chapter and Helium.com (sold to RR Donnelly) and currently serves as a Director of Hanley & Associates 
and as Chairman of the Board of Tuesday’s Children, the non-profit that serves 9/11 families, first 
responders and their families. David testified before the CFTC-SEC Joint Panel on Emerging Regulatory 
Issues in the wake of the May 2010 “flash crash,” and before the SEC Advisory Committee on Small and 
Emerging Companies on June 8, 2012 and again on September 7, 2012.  He has also testified in Congress and 
is often interviewed by the financial news media. 
© 2013 Grant Thornton LLP. All rights reserved. 

 
 
 
   
  
 
SEC Roundtable on Decimalization | Feb. 5, 2013                                                                                                                19                                                                                                                
Publications 
David and Edward Kim have co-authored a number of Grant Thornton studies, including Why are IPOs in the 
ICU? in 2008. Released in the fall of 2009, Market structure is causing the IPO crisis (updated by Market structure is 
causing the IPO crisis — and more in 2010) and A wake-up call for America have been entered into the 
Congressional Record and the Federal Register. They also authored the chapter, Killing the Stock Market That 
Laid the Golden Eggs in the recent book on high frequency and predatory practices entitled, Broken Markets, by 
Sal Arnuk & Joseph Saluzzi, published in May 2012 by FT Press (Financial Times). Their most recent study 
on the impact of Decimalization, The trouble with small tick sizes, was released in the fall of 2013. 
© 2013 Grant Thornton LLP. All rights reserved. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                20                                                                                                                SEC Roundtable on Decimalization | Feb. 5, 2013
About Grant Thornton LLP 

Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global 
audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a 
worldwide partnership, as each member firm is a separate and distinct legal entity. 
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Grant Thornton 
An instinct for growth" 
© Grant Thornton LLP 
All rights reserved 
U.S. member firm of Grant Thornton International Ltd 

 
David Weild, Edward Kim and Lisa Newport September 2012 
The trouble with small tick sizes 
Larger tick sizes will bring back capital
 
formation, jobs and investor confidence
 
Capital Markets Series 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
The authors gratefully acknowledge the 
contributions of Adele Hogan to the legal and 
regulatory aspects of this report, including 
the enclosed draft legislation and phase-in 
implementation schedules that we are 
providing to inform the discussion. 
Adele Hogan is a corporate and securities 
lawyer at Sheppard Mullin Richter & 
Hampton LLP in New York City. Over the 
course of her career, Hogan has completed 
more than $250 billion in corporate deals. 
She was previously the chair of the New 
York City Bar Association’s Securities 
Regulation Committee and its Financial 
Reporting Committee. 

      
       
       
       
      
          
      
       
       
          
       
       
       
      
       
       
      
       
      
      
       
       
       
      
      
      
      
      
      
      
Contents 
1 Executive summary 
5 Tribble troubles (penny tick sizes) 
10 Title I, Section 106(b): The hope inside the JOBS Act 
17 Growing recognition that tick sizes must be increased (at least for 
small-cap stocks) 
21 The SEC’s Report to Congress on Decimalization: Missing the 
forest for the trees 
25 Eating away at the “on-ramps” (small investment banks) 
27 Eating away at IPO aftermarket profitability (support for public 
companies) 
28 Small-caps can’t create systemic risk (so why not build a small-cap 
market to drive growth?) 
30 The effective representation of corporations (the job creators) 
was destroyed 
32	 Why some large investment banks, large investors and stock 
exchanges fight for smaller tick sizes, despite their negative 
impact on the economy 
33	 Beware of the hidden agendas of those who champion smaller 
tick sizes 
34 Tick sizes: The academic perspective and international practices 
37 Recommendations and conclusions 
41 Appendix A: Proposed preliminary draft legislation: The JOBS Act, 
Part 2 
44 Appendix B: Proposed preliminary phase-in implementation plan 
52 Appendix C: Tick size standards around the world 
58 Appendix D: Tick size changes on the NASDAQ, NYSE and AMEX 
60 Appendix E: IPO economics 
61 Appendix F: IPO success rates 
64 References 
66 About the authors 



  
 
 
 
 
 
 
 
 
 
 
	   		   						
 
 
								
 
			    				   		
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
   
 
 
 
 
  
 
Executive summary
 
The Jumpstart Our Business Startups (JOBS) Act, signed into 
law on April 5, 2012, delivered two of the three legs of the stool 
required to revive the U.S. IPO market: 1) a framework to lower 
costs for small companies accessing the public markets, and 2) a 
framework to improve company communication with investors 
in the public and private markets. The authors argue that a 
framework to realign economic incentives in the public markets, 
primarily through a higher tick size (the minimum increment in 
which a stock or other security can trade) pricing regimen, is the 
essential third leg that is currently missing from the stool. The 
authors conclude that higher tick sizes will: 
•	 lead to investment in the ecosystem (research, stock sales, 
investment banking and capital commitment to provide 
institutional liquidity) required to successfully take 
companies public and support them in the aftermarket; 
•	 favor long-term investors and stock pickers over short-term 
traders; and 
•	 increase investor confidence by reducing the number of price 
points at which stocks are traded and by limiting computer 
trading behaviors. 
The authors contend that the current penny and sub-penny 
tick size regimen, especially as applied to less-visible and less-
liquid stocks — the natural state of most public companies 
and nearly all small public companies — is at the root of the 
systemic decline in the U.S. IPO market and that it contributes 
to trading behaviors that undermine investor confidence. 
While the current system may be tolerable (trading behaviors 
aside) for large-cap and mid-cap stocks with adequate natural 
liquidity and visibility, it is detrimental to issuers and investors 
in the more than 80% of listed companies that are small-cap 
and smaller and do not enjoy natural liquidity and visibility. 
They offer quantitative and qualitative evidence that the 
majority of harm to the U.S. IPO market was caused in 1997 
and 1998 by the implementation of the Order Handling Rules 
and Regulation Alternative Trading Systems, which caused 
the bankable spread
1
 available to small investment banks to 
drop from 25 cents per share to the minimum tick sizes of 6.25 
cents (for NASDAQ stocks priced greater than $10) and 3.125 
cents (for NASDAQ stocks priced under $10). This shift, from 
a quote-driven to an electronic-order-driven market, set the 
conditions under which decimalization would be implemented 
in 2001. However, decimalization, which further eroded the 
bankable spread from 6.25 cents and 3.125 cents to 1 cent, was a 
comparatively minor change — essentially a coup de grâce that 
removed any remaining economic incentives required to sustain 
a vibrant market and help support the U.S. economy. 
The most important provision of the Jumpstart Our Business Startups (JOBS) Act, signed into law on April 5, 2012, is a little-known section (Title I, Section 106(b)) titled 
“Other Matters — Tick Size.” In it, Congress requires the SEC to conduct a study on the “transition to trading and quoting securities in one penny increments, also known as 
decimalization... [and] the impact that decimalization has had on the number of initial public offerings since its implementation relative to the period before its implementation.” 
In our view, decimalization — a euphemism for the collapse in trading spreads, tick sizes and commissions — decimated the U.S. IPO market when it began in earnest 
with the 1998 implementation of Regulation ATS (alternative trading systems). 
Adding back adequate economic incentives (through higher tick sizes, which may be the simplest way to accomplish this) to make the aftermarket support of small public 
companies once again profitable is likely the best way to achieve Congress’s intent to bring back the small IPO and associated job growth. 
This is a notion that the authors use to describe how spreads are seen from the vantage point of market makers. It is the portion of a spread that market makers can reasonably rely 
upon to compensate them for their investment in capital, research and sales support. In a quote-driven market (pre-1998), bankable spreads were largely equivalent to quoted spreads, 
while in the electronic-order-driven market (post-1998), bankable spreads fell to the minimum tick size. 
The trouble with small tick sizes 1 
1 

 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
  
  
 
  
 
 
 
The authors recommend two alternative solutions — 
encompassed in what we call The Jobs Act, Part 2 — to 
customize tick sizes
2
 and create needed economic incentives 
to rebuild the ecosystem to support capital formation. Such 
solutions, which can be used individually or in combination, 
should be implemented via an SEC pilot program to provide 
valuable information before fully phasing in the solutions across 
the entire market.
3
 Both solutions rely on market forces to select 
tick sizes, as opposed to the current SEC-mandated system. The 
two recommended alternative solutions (which may be used in 
combination
4
) are as follows. 
1.	 Issuer choice of tick size, where issuers of all sizes, but small-
cap companies in particular, are given the authority to choose 
their own tick size within a range that is capped at a maximum 
of some percentage — say, 5% — of their share price. 
An issuer’s board of directors would choose its tick size by 
consulting with institutional investors, investment banks and 
stock exchanges in order to arrive at an optimal increment for 
its shares that would address both the needs of the ecosystem 
and the liquidity in its shares. 
Pros 
Cons 
Empowers issuers. 
Enables mass customization of micromarkets. Eliminates the one-size-fits-all 
penny and sub-penny market structure that many believe is undermining 
capital formation and job creation. 
Educates management and boards by compelling them to engage in a 
discussion with investors, stock exchanges, investment banks and other 
advisers on how choice of tick size may impact equity research coverage, 
capital commitment, liquidity and investor interest. 
Creates a wide variety of data for analysis that will paint an unprecedented 
picture of how tick sizes impact market quality (e.g., volume, liquidity, 
volatility, research coverage). 
Will curtail speculative and high-frequency trading by adding “friction” (cost) 
to trading, thereby favoring fundamentally oriented, long-term investors. 
Will increase the incentive for stockbrokers to market shares to investors. 
Shifts “aftermarket support” back to Wall Street and may allow management 
to focus more time and energy on running the business. 
Increases complexity, which is why some prefer to limit the tick size options to 
simple increments of 1 cent, 5 cents, 10 cents, 20 cents, 50 cents and even 
$1 increments on high-priced stocks. 
Issuers will have to invest time in understanding market structure, but this 
understanding should pay dividends by making issuers better equipped to 
interact with investors and investment banks. 
Anytime incentives are increased to market stocks to investors, there is 
potential for increases in sales practice abuses. This will require increased 
enforcement on the part of the SEC and FINRA. 
2	 
Liquidity rebates, payment for order flow, executions within tick increments through dark pools and other mechanisms that effectively enable trading within established tick sizes should be 
eliminated to create tick size “integrity.” Everyone in the market should obtain the same tick economics which will enhance investor confidence through a sense of fairness and transparency. Tick 
size integrity will also encourage competition on the basis of innovation and value creation — not simply trade economics to the dealer at the expense of investor best interests. The result will be 
to improve “best execution.” 
3	 
The SEC has traditionally used pilot programs as a test and phase-in implementation strategy. 
4 	
In the instance where the “issuer choice” alternative is used, for issuers that have not affirmatively made a choice in tick size, there might be a default option. That default option could be fulfilled 
by “algorithmic customization” of the issuer’s tick size. 
2 The trouble with small tick sizes 

  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
  
 
 
 
 
 
 
 
 
 
    
 
  
  
  
 
  
   
   
  
 
2.	 Algorithmic customization of tick size, where the SEC 
could automate the “mass customization” of tick sizes via 
a simple algorithm that establishes increments at one-half 
of the average quoted spread of a stock over some defined 
period of time, e.g., trailing 12 months.
5 
Stock exchanges increasingly acknowledge that today’s 
market structure is effective only for a small minority of 
innately liquid, mostly large-cap stocks, and that higher 
priced and less-liquid stocks could benefit from higher-
tick sizes, while lower-priced and extremely liquid stocks 
could benefit from smaller tick sizes. The New York Stock 
Exchange (NYSE), NASDAQ and BATS have jointly 
petitioned the SEC to request smaller tick sizes in very liquid, 
low-priced companies.
6
 Market participants have suggested 
that the logical extension of this request would be allowing 
larger tick sizes for illiquid and/or high-priced stocks. 
Pros 
Cons 
Simple, in that it requires no input from issuers.	 
Requires an optimal algorithm.
7 
Enables mass customization of micromarkets. Eliminates one-size-fits-all Increases complexity, which is why some prefer to limit the tick size options to 
penny and sub-penny market structure that many believe is undermining simple increments of 1 cent, 5 cents, 10 cents, 20 cents, 50 cents and even 
capital formation and job creation. $1 increments on high-priced stocks. 
Requires no investment of time by management or management boards of	 No opportunity to educate management and boards by requiring them to 
directors in determining tick size.	 engage in a discussion with investors, stock exchanges, investment banks and 
other advisers on how choice of tick size may impact equity research coverage, 
capital commitment, liquidity and investor interest. 
Creates a variety of data for analysis that will paint an unprecedented picture
 
of how tick sizes impact market quality (e.g., volume, liquidity, volatility,
 
research coverage).
 
Will curtail speculative and high-frequency trading by adding “friction” (cost) May exacerbate high-frequency trading in already liquid stocks (mostly S&P 
to trading of small-cap stocks, thereby favoring fundamentally oriented, 500-type stocks) where the algorithm dictates sub-penny quotes (i.e., even 
long-term investors. smaller tick sizes than currently occur). 
Shifts “aftermarket support” back to Wall Street and may allow management
 
to focus more time and energy on running the business.
 
5	 
For example, a stock that trades with a quoted spread of 20 cents might have a tick size of 10 cents (two increments within the natural spread). For a stock whose quoted spread is 1 cent 
    per share, the tick size might be one-half of 1 cent (two sub-penny increments). The division in two of natural spreads is based on history. In the early 1990s, when quote spreads were generally 
25 cents per share, most stocks traded in tick sizes of 12.5 cents. There were two ticks within the quoted spread, and capital formation for small businesses thrived. Academics have generally 
reported that small-cap stocks have not generally experienced a decrease in spreads, so a two-tick increment may best simulate the market-making incentives of the early 1990s, when small 
company capital formation thrived. However, further study may be needed to determine the optimal number of ticks. Trading-oriented entities should argue for smaller tick sizes (more ticks) and 
investment-oriented entities should argue for larger tick sizes (fewer ticks). 
6	 
www.sec.gov/spotlight/regnms/jointnmsexemptionrequest043010.pdf. 
7	 
Most 25-cent spread stocks traded in 12.5-cent tick sizes before 1998. The sub-$50 million IPO eroded with the move to 6.25 cent tick sizes. As a result, we believe that limiting the number of 
ticks per quoted spread increment (e.g., to no more than two, and possibly only one), may be required to create an adequate economic incentive to materially improve capital commitment, 
research, and sales coverage for many issuers. Therefore, the algorithm used might be as simple as this: [(average quoted spread over trailing 12 months) divided by 2 = tick size] or simply 
[(average quoted spread over trailing 12 months) = tick size]. 
The trouble with small tick sizes 3 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
  
 
  
 
 
 
 
  
 
 
 
 
 
 
 
   
  
 
Pilot program: Regarding trial and implementation, the authors 
suggest a pilot program, which the SEC should establish 
to examine larger tick sizes in a significant (hundreds) and 
representative (share price, volume, market value, etc.) sample 
of stocks. It must be acknowledged that while a pilot program 
would generate valuable data on the impact on short-term 
liquidity in these stocks, it will not enable the SEC to gauge 
the magnitude of commitments that Wall Street might make 
if it were certain that the size and scope of tick size increases 
would be made permanent. For example, Wall Street cannot be 
expected to hire permanent equity research analysts, institutional 
salespeople or sales traders (capital committers) in response to 
merely a pilot program. If this proposal is implemented and 
eventually expanded to the entire marketplace, the SEC may 
want to examine the magnitude of new investments in research, 
sales, trading and capital committed after a two- or three-year 
period. The authors believe that these commitments would be 
significant. 
Finally, the authors also recommend that there be an 
associated “Issuer Bill of Rights”: 
An Issuer (Job Creators) Bill of Rights would call for public 
companies to have: 
1.	 equal standing to the trade execution community at the SEC 
on market structure matters; 
2.	 representation in the form of a standing issuer advisory 
council to the SEC that comprises issuers and issuer 
advocates; 
3.	 transparency, timeliness and completeness of ownership 
data,
8
 because issuers deserve real-time trading and 
ownership data of all long and short activity; 
4.	 choice in market structure that is not “one-size-fits-all”; and 
5.	 market structures that encourage fundamental investment 
strategies over trading strategies. 
The recommended solutions, which the authors call 
The JOBS Act, Part 2, would build upon the JOBS Act. They 
would give issuers and their advocates a voice in this debate 
and provide the essential fuel through economic incentives 
that our capital markets and economy need. They would favor 
long-term, fundamentally oriented investors — the foundation 
without which the stock markets would cease to function — 
over short-term traders and would help to restore confidence in 
our stock markets. 
Large investor positions are currently disclosed to the market on a delayed basis. These data do not disclose short positions and do not help issuers understand in near real-time (days) which 
investors have been transacting in their stock. The SEC should require the timely release of all issuer ownership data to the issuer, subject to insider trading restrictions, so that issuer 
managements can make more effective use of their time. 
4 The trouble with small tick sizes 
8 

   
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
  
 
  
Tribble troubles (penny tick sizes)
 
“The financial system has been wounded by a flood of so-called innovations that merely 
promote hyper-rapid trading. ...Individual investors are being shortchanged.” 
Imagine a stock market in which the cost to buy and sell stocks 
is “free.” While it might appear to be shiny at first, the reality 
is that such a market would not survive. There would be no 
money to pay for research, so research would disappear. There 
would be no money to pay for salespeople, so all marketing of 
public company shares would cease. There would be no money 
to support liquidity, so institutional investors would abandon 
small companies — which are innately illiquid — in favor of 
large companies. There would be no money to pay for stock 
exchanges and alternative trading systems (ATSs). And there 
would be insufficient standing infrastructure to take companies 
public, so investor returns would evaporate. 
The stock market would collapse. 
John C. Bogle, founder of VANGUARD
 “A Mutual Fund Master, Too Worried to Rest” 
Jeff Sommer 
The New York Times 
August 11, 2012 
The reality today, however, is not far from the above fiction. 
The U.S. stock market, especially for smaller capitalization 
companies, has been in a state of progressive erosion that dates 
back to Regulation ATS and the collapse of tick sizes
9
 that 
culminated with decimalization in 2001 and the implementation 
of Regulation NMS (national market system) beginning in 2006. 
The stock market is in its 15th year of a slow, relentless collapse, 
where companies delist at a rate three times that at which new 
companies go public. 
Today’s stock market is nearly transaction cost-free and 
overrun by trading schemes that displace investors: Tick sizes 
are down to a penny or less, and retail commissions are down 
to $5 a trade. High-quality sell-side research has eroded, as 
talented analysts have fled Wall Street for hedge funds in what 
a former head of the Securities Industry and Financial Markets 
Association’s (SIFMA) research committee aptly called the 
“brain drain.” The median market value of companies covered by 
equity research analysts has steadily increased. There are far fewer 
investment banks acting as bookrunners on IPOs than in the 
1990s. Middle-market institutional sales desks have all been closed. 
Tick size is the minimum increment in which a stock or other security can trade. 
The trouble with small tick sizes 5 
9 

  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
“The Trouble with Tribbles,” (or tick sizes in stock markets) 
is a celebrated Star Trek episode that introduced viewers to 
Tribbles. These tiny, asexual, furry animals are initially soothing 
and highly sought after — like small tick sizes are to consumer 
advocates and many micromarket economists — until they 
multiply. The prolific breeding of the Tribbles (tick sizes) 
rapidly overwhelms the Starship Enterprise (the U.S. stock 
market), consuming all of the crew’s food (revenue to support 
small brokerage firms) until, at the brink of suffocation (market 
collapse), the Tribbles (tick sizes) begin to die off. 
The trouble with U.S. stock markets is that our Tribbles 
have not died off and, until recently, have been on a more than 
decadelong breeding and feeding frenzy. Congress and the SEC 
must step in to reverse the damage by driving increases to tick 
sizes, especially in sub-$2 billion market value stocks. 
Tick sizes have multiplied from four ticks to the dollar 
(one-fourth of a point in the early 1990s) to eight ticks to the 
dollar (one-eighth of a point) to 32 ticks to the dollar (effected 
by Regulation ATS) to 100 ticks to the dollar (effected by 
decimalization) and finally to as many as 1,000 ticks to the dollar 
(effected by Regulation NMS) in dark pools and more. The 
United States suffocated support for small-cap public companies 
Many have been misled by the artful misuse of “quote” and “tick” jargon. 
•	 Tick size: The minimum increment in which a stock or other security can trade. This number is largely determined by regulators (permission) and technology 
(capability). In the early 1990s, minimum tick sizes were largely in 12.5 cent increments. Bankable spreads (see definition below), however, were frequently 
25 cents. Tick sizes were decreased to as little as 3.125 cents, after the implementation of the Order Handling Rules and Regulation ATS in 1997 and 1998. 
Tick sizes became a penny with the advent of decimalization in 2001. 
•	 Effective tick size: In a quote-driven market that either does not permit or is not dominated by electronic execution and electronic posting of limit orders, 
the effective tick size can be higher than the “stated” tick size. This was the case in the NASDAQ Stock Market in the early 1990s, and it led to a bankable 
and quoted spread (see definitions below) that was consistently higher than the stated tick size, leading to a higher effective tick size. The effective tick size in 
today’s markets is even less than the quoted tick size, as dark pools have allowed sub-penny trading and rebates within the tick. 
•	 Quoted spread: The difference between the best posted or advertised offer to buy a security and the best posted or advertised offer to sell a security. 
Referred to as the “bid-ask spread,” it is generally agreed that quoted spreads have declined since the 1990s for all but the smaller-capitalization stocks. 
•	 
Effective spread: Measured as twice the difference between the midpoint of the bid-ask spread and the price paid (or received) by investors. Some claim that 
a lower effective spread necessarily indicates higher liquidity. It does not. There are other dimensions to liquidity, including 1) the dollar value of the security 
traded, 2) the time it takes to complete the trade, and 3) the slippage in price (if the midpoint of the spread moves, it undermines most measures of liquidity). 
A higher effective spread that can accommodate greater volume in a shorter period of time is more “liquid” than a lower effective spread that can accommodate 
less volume over a long period of time. Generally speaking, highly liquid stocks are made more liquid by lower tick sizes, resulting in lower effective spreads. 
However, less-liquid stocks may be made more liquid by higher tick sizes and higher “bankable spreads,” resulting in higher effective spreads. 
•	 Bankable spread: A notion that the authors use to describe how spreads are seen from the vantage point of market makers. It is the portion of a spread 
that market makers can reasonably rely upon to compensate themselves for their investment in capital, research and sales support. In today’s electronic-order 
driven market, as a rule of thumb, the bankable spread is generally equivalent to the tick size. This was not always the case. In the quote-driven market that 
existed prior to 1998, the bankable spread was equivalent to the quoted spread and was therefore at multiples that were larger than the tick size. Bankable 
spreads declined dramatically in 1998 with the implementation of Regulation ATS, undermining the role of market makers (and liquidity, especially for naturally 
less-liquid stocks). Decimalization and Regulation NMS added to the decline in bankable spreads. 
6 The trouble with small tick sizes 

   
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
           
                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                            
 
by depriving small Wall Street firms of a revenue model that 
supports capital formation by investing in fundamental research, 
salesmanship and capital support. 
Cutting the number of ticks to the dollar (i.e., increasing tick 
sizes) in sub-$2 billion market value stocks will bring life back to 
capital formation and with it, innovation, job growth and U.S. 
competitiveness. Cutting the number of ticks to the dollar in 
large-cap stocks would limit speculation, high-frequency trading 
and so-called casino capitalism, by adding economic friction 
back into the markets. In the case of large-cap, high-priced 
stocks, most stock exchanges believe that an increase in tick size 
would increase liquidity, while smaller tick sizes would increase 
liquidity still further for lower-priced, large-cap stocks. 
Prior to 1998, our stock market structure provided a 
successful framework within which many small IPOs (sub-$50 
million in proceeds) accessed U.S. capital markets. From 1991 to 
1997, there were 2,990 small IPOs, representing nearly 80% of 
all U.S. IPOs, as shown in Exhibit  1 (see page 8). Although tick 
sizes during this time frame were largely in 12.5-cent increments, 
bankable spreads were largely in 25-cent increments. For 
example, in 1991, NASDAQ stocks priced at $10 or more traded 
with a tick size, or “floor,” of 12.5 cents, while stocks priced 
below $10 traded with a tick size floor of 3.125 cents. Their 
bankable spreads, however, still were frequently 25 cents. 
Market structure characteristics 
1995 
2012 
Large-cap subsidized small-cap 
No subsidies, small-cap fends for itself 
Retail markets stocks 
Retail manages portfolios 
Broad institutional sales coverage 
Narrow institutional sales coverage 
Profitable aftermarket (for Wall Street) 
Unprofitable aftermarket (for Wall Street) 
Information additive research 
Information mining (indexing, derivatives) 
Fundamental investing 
Technical and index investing 
Uncorrelated industries 
Increasingly correlated industries 
Quoted 
Electronic order driven 
Large tick sizes 
Small tick sizes 
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC. 
“That silent whir that you hear on the trading floors of Goldman Sachs,
 
Morgan Stanley and Credit Suisse is the post-apocalyptic sound of an oxygen-deprived,
 
computer-dominated trading floor that has been reengineered to respond to an
 
infestation of tiny ticks.”

 David Weild 
Grant Thornton LLP 
and                 former                 vice                 chairman                 of                 NASDAQ                 
The trouble with small tick sizes 7 

  
  
 
 
 
 
 
 
 
 
Exhibit 1: The "one-two punch" of small tick sizes and the shift to electronic-order-book markets precipitated a secular decline in the 
U.S. stock markets 
Tick size changes on the NASDAQ Stock Market overlaid on the drop in the number of small IPOs 
100% 
80% 
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 
Quote-driven market (pre-Reg. ATS) 
Effective tick size > minimum tick size 
Electronic-order-book market (post-Reg. ATS) 
Effective tick size collapsed to minimum tick size 
A Order Handling Rules 
B Regulation ATS 
C Decimalization 
D Sarbanes-Oxley Act 
E Regulation NMS 
Transactions 
raising less than 
$50 million 
$0.30 
Transactions 
raising at least
90% 
$50 million 
$0.25 
70% 
Percentage of total U.S. IPOs 
$0.20 
60% 
50% 
40% 
NASDAQ tick sizes
$0.15 
$0.10 
30% 
20% 
$0.05 
10% 
0% 
$0.00 
ABCD E 
Bankable 
spread or 
effective tick 
size 
Tick size for 
stocks ≥ $10
1 
Tick size for 
stocks < $10
2 
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic. 
Includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs. 
1
1991: $0.125 for NASDAQ stocks ≥ $10; 1997: $0.0625 for NASDAQ stocks ≥ $10. 
2
1991: $0.03125 for NASDAQ stocks < $10. 
Compare this to the period beginning in 1998, when 
bankable spreads and tick sizes converged in the wake of 
new Order Handling Rules and Regulation ATS. The rapid 
proliferation of electronically posted orders from electronic 
communication networks (ECNs), crossing networks and other 
ATSs inexorably drove down tick sizes and bankable spreads 
to only 1 cent per share — a level that was grossly insufficient 
to sustain small company capital formation. The aftermarket 
support model that had worked so well for so long had 
collapsed, and with it, inevitably, so did small company IPOs. 
8 The trouble with small tick sizes 

   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
Starting in 1997, a series of SEC-implemented regulations 
altered the economic infrastructure on which small 
companies relied: 
•	 Order Handling Rules (1997) required dealers to provide 
investors with their most competitive quotes. It laid the 
groundwork for greater competition between dealers, 
which allowed tick sizes and liquidity to narrow, with new 
regulations enacted in 1998 and 2001. 
•	 Regulation ATS (alternative trading systems) (1998) 
allowed approved electronic networks to link their securities 
and orders with registered exchanges. It exposed traditional 
trading venues like NASDAQ to fierce competition by 
driving down the volume of orders and reducing tick sizes to 
3.125 cents. 
•	 Decimalization (2001) required stocks to be quoted in 
decimals instead of fractions. Decimal quoting allowed a 
minimum tick size of 1 cent, which resulted in decreased 
liquidity in already illiquid stocks and increased algorithmic 
trading and speculative activity especially in already liquid 
stocks. Note that while decimalization is often cited as the 
source of the erosion in the U.S. equity markets, it was 
actually the combined effects of the Order Handling Rules 
and Regulation ATS that likely eroded most of the economic 
incentive to support small-cap stocks (and with it, the small 
IPO market). 
•	 Regulation NMS (national market system) (2005) 
implemented several rules to improve U.S. exchanges and 
overhaul their structures. Despite prohibiting sub-penny 
stock quotes, the SEC allowed certain exceptions for quoting 
and trade execution in these increments, such as dark pools, 
algorithmic trading or broker-dealers providing price 
improvements to a customer order. The exception became 
the rule, and many more trades were executed at sub-penny 
increments, further cementing the erosion of trading spreads 
that occurred between 1997 and 2001. 
As Exhibit 1 (see page 8) illustrates, prevailing tick sizes 
declined with the implementation of each of these rules, leading 
to the drastic drop in small company IPOs that occurred 
before Sarbanes-Oxley (SOX). The JOBS Act rolled back 
the cost of SOX 404(b) compliance for emerging growth 
companies (EGCs). However, the much bigger blight on the 
small IPO market is clearly the deterioration in tick sizes (and 
commissions), since this deterioration was concurrent with 
the drop in small IPOs. While these regulations were meant 
to reduce trading costs for investors, they have resulted in 
unintended consequences that are significant — decreasing the 
number of small-company IPOs, increasing the management 
burden of being a public company, and leaving a one-size-fits­
all U.S. stock market where only big brands and big stocks can 
sustain adequate visibility with investors. 
The trouble with small tick sizes 9 

  
 
 
 
 
 
 
 
 
 
 
						   		
 
 
 
 
								
								
			   							
 
800 
Title I, Section 106(b):
 
The hope inside the JOBS Act
 
The JOBS Act was motivated in large part by our previous 
studies that provided the first longitudinal analysis for the 
secular decline in the IPO and listed stock markets in the United 
States. Grant Thornton’s Capital Markets Series now includes 
Why are IPOs in the ICU? (2008), A wake-up call for America 
(2009), Market structure is causing the IPO crisis (2009), Market 
structure is causing the IPO crisis — and more (2010) and The 
tipping point: Is stock market structure causing more harm than 
good? (2011). 
These studies established the following: 
•	 Small (sub-$50 million) IPOs dropped dramatically in 1998 
Exhibit 2: The U.S. IPO market is broken 
with the implementation of Regulation ATS. This was the 
biggest one-event collapse in tick size in the modern history 
of U.S. stock markets, from 25 cents per share to 3.125 cents 
per share. 
•	 The small IPO market never recovered from the 
implementation of Regulation ATS. 
•	 The small IPO historically represented the lion’s share 
(nearly 80%) of the U.S. IPO market. 
•	 The dramatic drop in the small IPO market occurred four 
years before the Sarbanes-Oxley Act of 2002 — the scapegoat 
of both the IPO and public company equity listing declines. 
In the last decade, the number of IPOs has fallen dramatically, specifically deals less than $50 million in proceeds 
Price/share < $5.00 
Deal size < $50 million 
Deal size ≥ $50 million 
Number of U.S. IPOs 
700 
600 
500 
400 
300 
200 
100 
0 
520 average 
IPOs/year pre-bubble 
1996    1997    1998    1999     2000
128 average 
IPOs/year post-bubble 
1996 1997 1998 1999 2000 
B C D E F 
Bubble 
A Christie-Schultz study* 
B First online brokerage 
C Order Handling Rules 
D Regulation ATS 
E Online brokerage surges and stock bubble inflates; Gramm-Leach-Bliley Act 
F Regulation FD 
G Decimalization 
H Sarbanes-Oxley Act 
I Global Research Analyst Settlement 
J Regulation NMS 
539 average 
IPOs/year bubble 
1991     1992     1993    1994    1995 2001    2002    2003    2004    2005    2006    2007    2008    2009    2010    2011 
A GHI J 
Pre-bubble Post-bubble 
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic.
 
Includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.
 
*Christie, William G., and Schultz, Paul H. “Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?” 
Journal of Finance, Vol. 49, No. 5, 1994.
 
10 The trouble with small tick sizes
 

   
	  	  			   					  	
 
 
 
 
 
 
 
•	 There is a secular decline in IPO success rates that is 
independent of the Sarbanes-Oxley Act. Companies going 
public today are failing at increasingly higher rates as more 
deals are being withdrawn, priced below their initial filing 
range and trading below their offer price. This decline in IPO 
Exhibit 3: IPO success rates are in secular decline 
success rates has been exacerbated by the steady degradation 
in equity sales coverage of institutional and retail investors 
that is a reaction to the erosion in economic incentives from 
historically higher bankable spreads and commissions. 
Success rate of all IPOs 
50% 
100% 
70% 
60% 
80% 
90% 
40% 
20% 
30% 
10% 
0% 
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 
Source: Capital Markets Advisory Partners LLC.
 
Includes only corporate issuers, excluding funds, MLPs, SPACs and REITs.
 
Based on the average success rate of the last 30 filed deals, up to one year ago. A successful deal is defined as: 1) priced within one year of filing, 2) priced at or above the low end of the 

filing range, and 3) trading at or above issue price one month after pricing.
 
The trouble with small tick sizes 11 

  
		   					   			
 
 
 
 
 
 
 
 
						   				
 
 
 
 
 
  
 
 
 
 
 
250 
•	 As of year-end 2011, the number of publicly listed 
companies in the United States has declined 43.5% since 
the peak in 1997. The U.S. stock markets require nearly 388 
IPOs a year to replace what is delisted every year, versus the 
actual annual number of 128 IPOs per year since the dot-com 
bubble burst in 2000. If we excise the post-bubble period of 
2000 to 2003 to normalize the data, the market from 2004 
through 2011 would require 288 IPOs a year to replace what 
is delisted every year, versus the actual number of only 146 
IPOs per year. 
•	 The U.S. stock markets should be producing between 500 
and 1,000 IPOs per year. In our view, stock market structure 
modifications, beginning with the Order Handling Rules and 
Regulation ATS, have cost Americans millions of jobs (by 
depriving companies of public and private capital), depressed 
economic growth and placed a drag on investment returns 
(which track economic growth). 
The JOBS Act is an important first step to encourage small 
businesses to access U.S. capital markets, spur innovation, 
generate new jobs and revitalize the U.S. economy. It delivered 
two of the three legs of the stool required to revive the IPO 
market: 1) a framework to lower costs for small companies 
accessing the public markets, and 2) a framework to improve 
Exhibit 4: The U.S. listed markets − unlike other developed markets − have been in steady decline, with no rebound, since 1997 
Indexed value of selected global exchange listings (1997 = 0)
(100) 
1991   1992   1993    1994    1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011 
200 
150 
100 
50 
0 
(50) 
China 
Hong Kong 
Australia 
Deutsche Börse 
Tokyo 
To ronto 
London 
United States 
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and World Federation of Exchanges.
 
Based on the number of listed companies at year-end; excluding funds.
 
Data as of Dec. 31, 2011.
 
12 The trouble with small tick sizes
 

   
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
   
 
  
  
  
 
company communication with investors in the public and 
private markets. There is, however, a fatal flaw in the U.S. stock 
market structure that now needs to be addressed — namely, the 
third leg of the stool: the loss of the economic incentives required 
to sustain interest in small-cap stocks once they are public. 
Without adequate aftermarket incentives to support small public 
companies, the major IPO market recovery that was intended by 
the JOBS Act will not be achieved.
10
 Without an incentive-driven 
mechanism to support unknown and largely invisible companies 
(the vast majority of public companies) in the aftermarket for 
secondary liquidity, stock prices will languish, companies will 
continue to delist at an alarming rate, and the IPO market will 
Increased economic incentives (e.g., tick sizes) are the third leg of the stool. 
Lowered cost Improved issuer 
√ 
for issuers 
√ 
communication with 
investors 
Improve economic 
incentives to support 
especially small-cap stocks 
(increases in tick sizes) 
Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 
not recapture the shine that once led foreign markets to envy the 
U.S. stock market.
11 
The JOBS Act materially improved the utility of Rule 506 
of Regulation D offerings (by removing the prohibition against 
general solicitation) and raising the upper limit of Regulation 
A offerings from $5 million to $50 million. There is additional 
work to be done, however, concerning preempting state 
regulation more broadly. The secondary market (aftermarket) 
for Regulation D private placements is still subject to state 
regulation (Blue Sky Laws), and the primary and secondary 
markets for Regulation A offerings are generally subject to state 
regulations, as well. Although the SEC published the proposed 
rule, “Eliminating the prohibition against general solicitation 
and general advertising in Rule 506 and Rule 144A offerings” 
on August 29, 2012, the rule will be open for comment for at 
least 30 days and it will be a while longer before a final rule is 
published. We are also waiting on SEC rules that will govern 
what attorneys have taken to calling “Regulation A+.” State 
regulations currently add cost and uncertainty to issuers, 
brokers and investors, and they will inhibit the full development 
of these markets if they are not addressed. Thus, through the 
application of state regulation to private markets and penny tick 
sizes in public markets, the United States lacks a fully functional 
secondary market in either the private or the public market. 
In passing the JOBS Act, Congress recognized the need for 
greater insight and analysis of U.S. market structure, specifically 
10	 
Some will argue that private markets will pick up the slack, given relaxations to Regulation D offerings. However, there are no information standards of transparency and disclosure in private 
markets, and the rescission against the prohibition of general solicitation that applies to a Rule 506 private placement does not extend to the aftermarket for so-called secondary shares. 
11 	
In July 2011, one of the authors visited the London Stock Exchange and a wide array of institutional investors and market-making firms. When asked, those participants consistently cited the U.S. 
IPO market as what they once had envied about U.S. stock markets (specifically, Silicon Valley and the country’s former ability to birth entirely new, sometimes capital-intensive, industries such as 
biotechnology, semiconductors and the personal computer). Increasingly, it is apparent that foreign market professionals no longer envy our markets. Arnuk, Sal, and Saluzzi, Joe. “Killing the 
Stock Market That Laid the Golden Eggs,” Broken Hearts, July 7, 2012. 
The trouble with small tick sizes 13 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
  
  
asking the comptroller general to study the impact of state 
regulation on Regulation A, and instructing the SEC to study the 
impact of decimalization on the number of IPOs and liquidity 
for small- and mid-cap company securities.
12 
The JOBS Act also 
allows the SEC to set a minimum trading increment (1 cent to 10 
cents) if it determines that EGCs should be traded and quoted 
in trading spreads greater than 1 cent. While this provision of 
the JOBS Act covers only EGCs, we believe all companies, 
regardless of their market value, would clearly benefit from the 
support created by higher tick sizes. At a minimum, Congress 
should allow increased tick sizes for public companies with 
under $2 billion in market value. An optimal solution, however, 
would be for Congress to allow higher tick sizes for companies 
The degradation of support for small-cap public companies ripples through 
the private company market and likely depresses job formation in both markets. 
Small-cap public (asymmetrical order book) 
IPO (”canary in the coal mine”) 
Venture B,C, D round, etc. 
Angel  l  Venture A 
Large-cap public (symmetrical order book) 
Start-up: friends, family, angel 
Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 
of all market value sizes so that even large-cap companies can 
consider using it as a tool to dampen speculative trading and 
restore investor confidence. Even a company as large as Apple 
might want to discourage speculative activity and favor long-term 
investors by taking their tick size up slightly, or even making 
them smaller to encourage trading. Higher tick sizes will put 
markets more clearly back into the hands of investors and restore 
their confidence. It will also eliminate the risk of a two-tiered 
market, if the choice of tick size is available across all companies. 
Tick proliferation and quote flickering damaged 
the economy 
Tick proliferation,
13
 which has led to a loss of economic 
incentives to make markets, and quote flickering,
14
 are the flesh-
eating bacteria of the infrastructure needed to support the IPO 
market and aftermarket. 
Small ticks deprive the “on-ramps” (small investment banks) 
of the economics needed to sustain infrastructure, and these 
firms react by eating away at (cutting back on) the distribution 
needed to reach investors, the capital and capital committers 
required to support institutional liquidity, and the amount and 
quality of research coverage committed to small-cap stocks. This 
erosion of small-cap support creates a domino effect that ripples 
through the IPO, venture and start-up markets. 
Quote  flickering has increasingly become a thorny 
issue with the relentless advances in technology utilized by 
high-frequency and other algorithmic traders, but it is also a 
concern with markets where high-frequency trading is less 
evident.
15
 As far back as 2001, in the immediate aftermath of 
the implementation of decimalization, the SEC recognized the 
potential harm that could arise from this phenomenon. 
12 
JOBS Act, Title I, Section 106(b)(6)(A), “Tick Size, Study and Report.” 
13 
Tick proliferation is the decrease in tick sizes. 
14 
Quote flickering is measured by the rapid and repeated updates to the National Best Bid and Offer (NBBO).
 
15 
Based on recent conversations one of the authors had with R. Cromwell Coulson, president, CEO and director of OTC Markets Group.
 
14 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
   
  
In a speech before the Exchequer Club on July 18, 2001, in 
Washington, D.C., Acting SEC Chairman Laura S. Unger said, 
“Rapidly changing quotes in a sub-penny 
environment could have ramifications on 
market rules limiting ‘locked’ and ‘crossed’ 
markets and trading at inferior prices. These 
various rules are dependent upon being 
able to identify the best bids and offers at 
a given point in time — a feat not easily 
accomplished when any given quote is only 
visible for a brief moment.”
16 
Exhibit 5: The decline in U.S. listings 
Quote flickering has increased dramatically with the growth of 
high-frequency trading and its inherent rapid order placement 
and high cancellation rates. Despite the claims by high-frequency 
proponents that they add liquidity to the market, such transience 
in the actual best bid and offer cannot help but undermine 
consumer confidence in the quality of trade execution because 
it creates a perception of market instability in the minds of retail 
investors, even if no such instability actually exists.
17 
As a result of this steady erosion in resources committed to 
capital formation and aftermarket support, the ability of U.S. 
markets to originate and support new listings is well below the 
replacement levels needed to support economic growth. The 
total number of U.S.-listed companies has shrunk every year 
since 1997 — down 43.5% through year-end 2011 — exceeding 
the number of new IPOs joining U.S. exchanges (see Exhibit 5). 
6,500 
9,000 
7,500 
7,000 
8,000 
8,500 
5,500 
6,000 
5,000 
4,500 
U.S. listings have declined by 
43.5% since their peak in 1997 
Number of U.S. equity listings 
1991     1992     1993    1994    1995    1996    1997    1998    1999     2000    2001    2002    2003    2004    2005    2006    2007    2008    2009    2010    2011 
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and World Federation of Exchanges. 
Listings data as of Dec. 31 of each year; excluding funds. 
16 
www.sec.gov/news/speech/spch509.htm. 
17 
An excerpt from an April 10, 2010, letter from Chris Nagy, the head of order strategy and co-head of government relations at TD Ameritrade, to the SEC. Nagy’s comments, made in response to 
the SEC’s concept release on market structure, foreshadowed the flash crash, which occurred just one month after his letter. 
The trouble with small tick sizes 15 

  
 
 
 
		 
 
 
 
 
 
 
 
 
 
		 
 
 
 
 
 
 
 
 
 
 
 
   
 
800 
600 
400 
520 average
IPOs/year pre-bubble
600
1,200
1,000
800
1,200
700
200
400
0
128 average
IPOs/year post-bubble
600
1,200
1,000
800
1,200
700
200
400
0
A Christie-Schultz study*
B First online brokerage
C Order Handling Rules
D Regulation ATS
E Online brokerage surges and stock bubble inflates; Gramm-Leach-Bliley Act
F Regulation FD
G Decimalization
H Sarbanes-Oxley Act
I Global Research Analyst Settlement
J Regulation NMS
539 average
IPOs/year bubble
While 388 new listings per year are needed to maintain a steady 
of small company research, marketing support and capital 
number of listed companies, the United States has averaged only 
(liquidity) provisions. 
128 IPOs per year since 2001 (see Exhibit 2, page 10).
18 
• Job loss: In today’s stock market structure, most small 
companies’ exit strategies no longer include a public listing, 
This has resulted in the following: 
but rather a merger or acquisition. When these companies 
• Lower growth: Efficient markets need to do more than 
cannot raise capital effectively through the IPO market, they 
create rock-bottom trading costs for market speculators. 
must look to a merger or acquisition, and jobs are lost, not 
Such nearsighted actions, while attempting to alleviate stress 
gained. This represents an opportunity cost of millions of 
for one constituency, have served to destroy the economics 
jobs and untapped economic growth. We estimate that this 
for the entire ecosystem. Markets also need to improve 
dearth of IPOs has cost the United States as many as 9.4 
the allocation of capital and enhance long-term economic 
million additional jobs that might have been created after 
growth. U.S. economic growth will continue to be inhibited 
companies go public. If we add the private market effect (our 
by inefficient stock pricing discovery due to the degradation 
best estimate of the multiplier effect in the private market 
when more companies go public), the number of additional 
jobs increases to 18.8 million (see Exhibit 6). 
Exhibit 6: A major contributor to employment 
Maximum
Domestic companies going public in the United States
1,200 
+18.8 million jobs (direct plus private market effect) 
+9.4 million jobs (direct) 
+6.2 million jobs (direct plus private market effect) 
+3.1 million jobs (direct)	 
10 
additional jobs
20 
(direct plus private 
market effect)*
1,000 
Additional jobs (millions)
Maximum 
additional jobs 
(direct) 
Maximum 
additional IPOs 
Minimum 
additional jobs 
(direct plus private 
market effect)* 
15 
5 
Minimum 
200 
additional jobs 
(direct) 
Minimum
0
0 
additional IPOs 
1991  1992   1993  1994  1995  1996  1997  1998  1999  2000  2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  2011 
Actual number of 
*Best estimate of the multiplier effect in the private market of more companies going public. 
domestic IPOs 
Sources: Grant Thornton LLP, Dealogic and the U.S. Department of Commerce Bureau of Economic Analysis.
 
Domestic corporate companies going public in the United States as of Dec. 31, 2011, excluding funds, REITs and other trusts, SPACs and LPs.
 
Assumes an annual growth rate of 2.57% (U.S. real GDP growth, 1991-2011) and 822 jobs created on average post-IPO (see "Post-IPO Employment and Revenue Growth for U.S. IPOs,” 

Kauffman Foundation, May 2012).
 
18	 
If we excise the post-dot-com bubble period of 2000 to 2003 to normalize the data, the market from 2004 through 2011 would require 288 IPOs a year to replace what is delisted each year 
versus the current number of only 146 IPOs per year. 
16 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
  
  
Growing recognition that 
tick sizes must be increased 
(at least for small-cap stocks) 
An increasing number of stock market and securities industry 
experts have recently come out in favor of increasing tick 
sizes — whether for all stocks, limited to small-cap stocks, 
or by giving issuers control over their own tick sizes. This is 
a solution we favor, also backed by Professor James Angel 
of Georgetown University. See our “Recommendations and 
conclusions” (page 37). Also see Appendix A (page 41), where 
we have, with the help of Adele Hogan, drafted a bill that we 
hope will create a starting point for Congress. 
Growing recognition that some or all tick sizes must be increased 
In the table below, we summarize recent views — 
overwhelmingly in favor of increasing tick sizes — that were 
culled from a combination of 1) press accounts, 2) letters 
submitted to the SEC, and 3) congressional testimony (House 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises, June 20, 2011). 
Name Title Firm or institution Vantage point Position View 
James Angel Associate Professor Georgetown University Noted academic For Issuers, not the regulators, should decide 
what the spread should be in stocks. But if a 
company trades better with sub-penny pricing, 
then sub-penny should be permitted.
19 
Larry Tabb CEO Tabb Group Noted market structure 
analyst 
For Dime spreads should not be off the table and 
[should be] considered as well. This would 
incentivize brokers to trade and provide 
research for smaller and new companies.
20 
Joe Ratterman President and CEO BATS Global Markets Stock exchange For We would support an industry review of tick 
sizes and believe that in some cases the 
industry should consider quote increments 
less than a penny, and in some cases quote 
increments in nickels, dimes, or quarters 
probably makes sense as well.
21 
Daniel Coleman CEO GETCO Electronic market 
maker 
For Orders, particularly retail orders, would routinely 
receive better-priced executions if the minimum 
tick size were correlated to the share price of 
the security.
22 
19 
D'Antona Jr., John. “Wider Spreads and Fees Could Help Restore Investor Confidence,” Traders Magazine Online News, June 1, 2012. 
20 
Ibid. 
21
 Ratterman, Joe. “Customer segmentation — a fundamental shift for exchanges,” FTSE Global Markets, July 23, 2012. 
22
 U.S. House of Representatives, Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises hearing, Market Structure: Ensuring Orderly, Efficient, 
Innovative and Competitive Markets for Issuers and Investors, June 20, 2012. 
The trouble with small tick sizes 17 

  
  
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
Growing recognition that some or all tick sizes must be increased (continued) 
Name Title Firm or institution Vantage point Position View 
Kevin Cronin Global Head of 
Equity Trading 
INVESCO, speaking on 
behalf of the Investment 
Company Institute 
Mutual fund industry For We quite clearly are supportive of trying a pilot 
program with traditional tick sizes being moved 
from a penny to 5 cents or more. We certainly 
would have all kinds of interest in being very 
involved in that process, because, at the end of 
the day, it is our investors’ money that you’re 
looking to get more engaged in this. More 
transparency, better liquidity.  We think a pilot 
program would help us get to a better place 
with that.
23 
Joe Gawronski President and Chief 
Operating Officer 
Rosenblatt Securities Inc. Institutional agency 
broker 
For We support experimentation by regulators and 
legislators to provide new incentives for making 
markets in the shares of smaller companies. 
The provision of the recently adopted JOBS 
Act requiring the SEC to study whether wider 
minimum price increments would improve 
market quality for emerging-growth companies 
is one example of measures that could address 
this issue.
24 
Thomas Joyce Chairman and CEO Knight Capital Group Electronic market 
maker 
For We think the opportunity to widen spreads so 
that liquidity aggregates in places that people 
can more visibly see as opposed to having to 
trade in penny spreads all the time would be 
a net benefit [for small-cap companies’ capital 
formation]. If spreads widen, market makers 
might have an opportunity to have a more 
profitable business, and it might attract more 
sponsorship for more companies. I think that 
is something that is a likely outcome if spreads 
widened in an appropriate fashion...and there 
are a lot of firms that will tie research coverage 
to market making.
25 
Duncan Niederauer CEO NYSE-Euronext Listed stock exchange For We think SMEs [small- and medium-sized 
enterprises] are overly burdened by some 
earlier regulations. ...We would be very in favor 
of experimenting with allowing companies to 
select their own tick size. Ultimately you could 
argue that could be their decision. We’ve studied 
internally what we think it would take for us to 
implement something like that; I don’t think the 
implementation process would be long.
26 
Cameron Smith President Quantlab Financial, LLC Quantitative trading For Policymakers should create categories of 
stocks with different quote increments. While 
decimalization and penny increments have saved 
investors hundreds of billions dollars, a one-size­
fits-all approach, regardless of whether a stock 
trades at $5 or $500, does not make sense. I 
tend to favor the calibrated tick size approach, 
but at the same time I also favor innovation. So, 
to the extent that one of the exchanges wants 
to experiment with having bigger tick sizes for 
some small-cap companies or up-and-coming 
companies, and wants to have a pilot [program] 
to do that, I would be supportive of that as well.
27 
23 
Ibid. 
24 
Ibid. 
25 
Ibid. 
26 
Ibid. 
27 
Ibid. 
18 The trouble with small tick sizes 

   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
Growing recognition that some or all tick sizes must be increased (continued) 
Name Title Firm or institution Vantage point Position View 
Dan Mathisson Head of Equity Credit Suisse Securities Algorithmic trading Neutral We would have no problem with an experiment 
Trading to allow corporates to choose their own tick 
sizes. I think that it would not make a significant 
difference in the IPO markets or in the ability to 
raise capital. ...I do not think it would harm the 
markets, but I don’t think it would significantly 
help either.
28 
William O’Brien 
Jim Toes 
Jeffrey Solomon 
CEO 
President and CEO 
CEO 
Direct Edge 
Security Traders 
Association 
Cowen and Company 
Stock exchange 
Trade group 
Growth company 
investment bank 
For 
For 
For 
Regulation should be made more flexible to 
enhance the trading experience for smaller 
companies. An unintended consequence of 
Regulation NMS is the tendency to impose a 
“one-size-fits-all” version of market structure on 
issuers, regardless of their characteristics and 
needs. The potential widening of tick sizes can 
definitely help increase the liquidity at the bid 
and ask.
29 
The unintended consequences of decimalization 
have been dramatic, most noticeably, in the 
significant decline in the quantity of liquidity 
providers in the stocks of smaller- and medium-
sized companies and those with less than active 
trading markets. [In establishing a pilot program 
to study tick size changes] we would focus on 
dollar volume traded rather than the price of the 
security or market cap, because that is the best 
indicator for how much natural customer flow 
resides in a particular stock.
30 
One of the principal reasons for the lack of 
liquidity in small-cap stocks can be directly 
attributed to the advent of decimalization. 
Congress and the regulators should consider 
increasing the tick increment for emerging 
growth companies or allow companies to 
determine their own increment size.
31 
By increasing the tick size for small-cap 
companies, investment banks would be 
appropriately incentivized to provide increased 
aftermarket support for these issuers by 
committing firm capital to support market-
making in these securities. Let me be clear, this 
capital commitment is not proprietary trading; 
it is merely ensuring inventory is available 
to provide liquidity to customers. Increasing 
the tick size would also make it easier for an 
investment bank to commit more resources, 
including research coverage, to smaller 
companies thereby increasing the ability of 
smaller companies to access the public equity 
markets. ...By increasing the tick size, I believe 
the IPO market for smaller transactions and for 
smaller companies will re-open significantly, 
thereby providing emerging companies with 
the growth equity capital they need for the 
development of their businesses and [to] create 
more jobs here in the U.S.
32 
28 
Ibid. 
29 
Ibid. 
30 
Ibid. 
31 
Ibid. 
32 
Cowen and Company letter to the SEC Advisory Committee on Small and Emerging Companies, June 4, 2012. 
The trouble with small tick sizes 19 

  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
Growing recognition that some or all tick sizes must be increased (continued) 
Name Title Firm or institution Vantage point Position View 
James Fehrenbach 
Managing Director 
Piper Jaffray Growth company For Larger minimum trading increments (“tick sizes”) 
and 
and Head of Equity 
investment bank are essential to revive support for the IPO and 
Bradford Pleimann 
Institutional Sales; 
small capitalization markets. Without higher tick 
Managing Director 
sizes, we believe that The JOBS Act will fail to 
and Head of Equity 
broadly revive the IPO market and job growth — 
Trading 
clear intents of Congress. The regulatory changes 
noted above — not just Decimalization but the 
changes that preceded Decimalization, created 
a U.S. equity market that is now geared to the 
trading of large capitalization stocks but has 
caused the steady erosion in aftermarket support 
(including liquidity) for small capitalization stocks. 
We believe that there is ample IPO “manufacturing 
capability” in the United States and an ample 
number of companies that could qualify to go 
public if the aftermarket support problem was 
solved through adequate economic incentives 
(increases in tick sizes). ...Increases in tick sizes, 
we believe, would do more for capital formation 
and job growth than all the other provisions of The 
JOBS Act, combined. It is the “missing link” for 
firms like Piper Jaffray, which have a long tradition 
of serving the growth company marketplace.
33 
Phil Johnston Partner, Head of ThinkEquity LLC Growth company For In discussions with both sides of our business, 
Equities investment bank quote increments or higher tick sizes could be 
essential to help create more investment and 
quite frankly enable the recreation of firms like 
Hambrecht & Quist, Montgomery, Robertson 
Stephens, and Alex Brown. Firms that were 
maniacally focused on supporting innovation and 
supporting small cap stocks from seed financings, 
all the way through to the IPO process and as 
small-cap public companies. ...Wider quote 
increments are essential to help revive support for 
the IPO and small capitalization markets. Without 
wider quote increments and other initiatives, 
The JOBS Act will fail to broadly revive the IPO 
market and job growth. ...We need to change the 
following statement, “When is the last time you 
heard about a company that wanted to go public?” 
The current environment needs to change so that 
statement can read, “We are excited to access 
the public markets” instead. Quote increments can 
be one step to encourage investment in growth 
and jobs.
34 
33 
Piper Jaffray letter to the SEC Advisory Committee on Small and Emerging Companies, June 8, 2012. 
34 
ThinkEquity letter to the SEC Advisory Committee on Small and Emerging Companies, June 8, 2012. 
20 The trouble with small tick sizes 

   
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
	   	   	  	   	   	  	   		
	 	  	 	
	   	   	 		 	    	 	 	  	  						
	  	 	 	   	  	
	  	    		 		  	
             
	    	
	   		    	    	   	 	   	
	 	 		   	 	   	  	  	
	  	   	 	   	 	
 
 
 
 
 
 
 
 
 
	   	 
 
 
 
 
 
  
 
 
 
 
The SEC’s Report to 
Congress on Decimalization: 
Missing the forest for the trees 
According to the National Center for Children in Poverty, “Nearly 15 million 
children in the United States — 21% of all children — live in families with incomes 
below the federal poverty level — $22,350 a year for a family of four. Research shows 
that, on average, families need an income of about twice that level to cover basic 
expenses. Using this standard, 44% of children live in low-income families.”
35 
The SEC’s Report to Congress on Decimalization (the SEC 
Report) acknowledges the key “transition” period of 1996–1998 
(the Manning Rule, The Order Handling Rules and Regulation 
ATS) when most of the damage was done to market incentives 
as effective tick sizes moved from 25 cents to 12.5 cents to 3.125 
cents, but it focuses on the comparatively minor transition that 
took tick sizes from 3.125 cents to 1 cent with the advent of 
decimalization in 2001 in its analysis. The SEC Report analyzes 
trees (academic studies, none of which measures the long-term 
impact of changes to market structure on capital formation and 
jobs) but needs to also consider the forest (the long-term impact 
of market structure changes on the stock market ecosystem): 
•	 The United States has 43.5% fewer listed public companies 
since the peak in 1997. 
•	 The United States is averaging a fraction of the IPOs that 
it did in the 1990s and 1980s. 
•	 Today’s stock markets contribute to unemployment, add 
to the budget deficit and indirectly contribute to 
childhood poverty. 
•	 The major structural damage occurred during the period 
leading up to decimalization (1996 to 1998), not with 
decimalization (the “coup de grâce”) in 2001. 
The SEC Report concludes: 
“The Staff believes that the Commission should solicit the views 
of investors, companies, market professionals, academics, and 
other interested parties on the broad topic of decimalization, 
how to best study its effects on IPOs, trading, and liquidity for 
small and middle capitalization companies, and what, if any, 
changes should be considered.” 
However, we believe the forest is on fire. 
Fact: The small IPO market fell off a cliff in 1997 and 1998 when 
the Order Handling Rules and Regulation ATS combined to gut 
achievable spread economics to dealers (see Exhibit 1, page 8). 
Fact: The small IPO market (traditionally more than 70% of 
IPOs) never recovered (see Exhibits 1 and 2, pages 8 and 10). 
Fact: The U.S.-listed stock markets are in a steady state of 
erosion, having lost listed companies 
every single year since 1997 
(see Exhibits 4 and 5, pages 12 and 15). 
Fact: More capital formation would drive entrepreneurship, 
job growth, investment returns and tax revenues (see Exhibit 6, 
page 16). 
Fact: The SEC has the authority to make changes that will 
improve capital formation, entrepreneurship, job growth and tax 
revenue.
36 
A nation the size of the United States needs more than one 
stock market structure. We recommend that the SEC begin 
experimenting with multiple public market structures that 
might reasonably kick capital formation and job creation into 
high gear. There is little downside for the American people, and 
clearly there is tremendous upside if we can get it right. 
35 
www.nccp.org/topics/childpoverty.html. 
36 
www.sec.gov/about/whatwedo.shtml. 
The trouble with small tick sizes 21 

  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
									
   
  
 
 
 
 
 
   
 
             
   
 
 
 
 
 
 
      
									   	
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
The SEC’s empirical findings 
The empirical findings rely on short-term quantitative analysis 
by micromarket economists. This approach does not generally 
study the long-term impact of market structure changes on the 
stock market ecosystem (notably the number of bookrunning 
managers of IPOs, institutional and retail sales, the depth of 
equity research coverage and capital commitment) that may in 
the aggregate be essential to sustain a robust IPO market and 
with it, to adequately support U.S. growth. 
In this section, we quote verbatim the SEC’s nine findings 
and offer our perspective, as seasoned practitioners with an 
analytical bent, as to why we are troubled by this analysis. 
1. Spreads 
The  SEC Report concludes: 
Main empirical finding of the academic literature: Both effective 
and quoted spreads declined after decimalization. However, there 
is some evidence that, at least for NASDAQ small capitalization 
stocks, the decline is not statistically significant. The effect of 
decimalization on institutional transaction costs is mixed. 
We observe: 
•	 Effective and quoted spreads are not the only relevant 
notions — a concept of bankable spread must be considered: 
–	 The SEC analysis takes the perspective of an investor 
executing a trade and not the perspective of a market 
maker committing capital. An essential concept is “what 
is the bankable spread” that market makers can rely on 
to compensate themselves for taking on risk positions 
(i.e., committing capital to the purchase or shorting of 
a stock). In an electronic market, where anyone can 
step in front of a market maker for 1 cent, that bankable 
spread is 1 cent. Contrast this to the early 1990s. 
In a quote-driven market, a market maker could quote 
at a quarter-point spread, buy at the bid, mark up to the 
ask side of the market, and earn a 25-cent spread — thus, 
the bankable spread was 25 cents. The SEC focuses 
on multiple academic definitions of spreads that are 
divorced from the reality of operating a market-making 
business that employs salespeople, commits capital and 
issues equity research opinions. 
•	 The analysis also generally ignores the period from 1996 to 
1998, when the larger changes to bankable spread and tick 
size were made. 
•	 The analysis concludes that the academic studies “...are 
contrary to the argument of...the Grant Thornton paper...that 
the spreads of small stocks declined significantly.” In fact, when 
you understand that we are focused on “bankable spread,” then 
you begin to understand that indeed, we are correct: Minimum 
tick size is the upper limit of the bankable spread. 
2. Depth 
The SEC Report concludes: 
Main empirical finding of the academic literature: Quoted depth, 
on average, declined after decimalization, but cumulative depth 
at competitive prices did not change. 
We observe: 
•	 This section focuses on the “trees” without asking the 
question “What is the impact on the forest?” We are troubled 
by this measurement of short-term effects where cumulative 
depth did not immediately change. It takes years for systems 
to adjust, jobs to be cut, and predatory computer trading 
(front-running) practices to emerge. The academic literature 
appears largely silent on the long-term impact on our markets. 
22 The trouble with small tick sizes 

   
 
 
 
						
						
 
 
 
 
 
			  							
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
					   	   		   			
3. Execution speed 
The SEC Report concludes: 
Main empirical finding of the academic literature: The total 
time to work institutional orders appears to have increased 
after decimalization. 
We observe: 
•	 We agree: Institutional liquidity has declined. 
•	 Anecdotally, institutional liquidity has declined significantly 
in small-, micro- and nano-cap stocks. This is consistent with 
the academic literature, which concludes that smaller tick 
sizes make illiquid stocks more illiquid. 
4. Trade size 
The SEC Report concludes: 
Main empirical finding of the academic literature: Trade 
sizes generally fell after decimalization, particularly for more 
liquid stocks. 
We observe: 
•	 The bigger question is “Why have trade sizes fallen?” This 
has more to do with the computerization of trading, and the 
ability of algorithmic traders and high-frequency traders to 
step in front of institutional orders. One important strategy 
has been to put large orders into computer “wood chippers,” 
scattering them about to minimize “information leakage.” 
5. Specialist/market maker participation and profitability 
The SEC Report concludes: 
Main empirical finding of the academic literature: Market maker 
participation increased after decimalization across all market 
capitalization categories, but decimalization does not appear to 
have reduced profitability. 
We observe: 
•	 This section mixes apples and oranges: It discredits the 
IPO Task Force Report and the Grant Thornton view that 
decreases in tick sizes harmed market-making profitability 
by discussing “specialist” data as opposed to “dealer” data. 
To be clear, when practitioners discuss small-cap market 
making, they are generally referring to the dealer market (i.e., 
NASDAQ pre-Regulation ATS) and not the specialist market. 
•	 Two of the authors are former senior investment bankers 
with previous experience running these businesses. We 
know from our direct experience that the Order Handling 
Rules, Regulation ATS and subsequent decreases in tick sizes 
hurt market-maker profitability. Capital commitment to 
NASDAQ market making has gone the way of the dodo bird. 
6. Market versus limit orders 
The SEC Report concludes: 
Main empirical finding of the academic literature: Decimalization 
does not seem to have reduced the use of limit orders, but it does 
appear to have decreased the size of limit orders and increased 
the frequency of cancellation. 
We observe: 
•	 This point does not appear to be relevant in resolving the 
crisis in capital formation. 
The trouble with small tick sizes 23 

  
 
 
 
 
					   	   		   			
 
 
 
 
 
									
 
 
 
 
 
 
  
 
 
 
									
 
  
  
  
  
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
  
  
   
7. Routing of orders 
The SEC Report concludes: 
Main empirical finding of the academic literature: Decimalization 
has not caused substantial changes to order routing practices, but 
it may have prompted traders, particularly large institutions, to 
seek more volume through floor orders. 
We observe: 
•	 This point does not appear to be relevant in resolving the 
crisis in capital formation. However, we should point out 
that order routing practices changed dramatically with the 
later implementation of Regulation NMS. 
8. Volatility 
The SEC Report concludes: 
Main empirical finding of the academic literature: Decimalization 
increased volatility in the short run but decreased volatility in the 
long run. 
We observe: 
•	 Although stock market volatility has increased over the past 
decade, even after adjusting for the credit crisis in 2008 and 
2009,
37
 the forest in this case is “How does the average retail 
investor feel about stock market volatility, quote flickering 
and seeing his or her orders stepped in front of for a penny?” 
Decimalization (and Regulation NMS) combined to change 
markets in ways that we believe are steadily undermining the 
confidence of the average retail investor. 
37 
“Market Swings Are Becoming New Standard,” The New York Times, September 11, 2011. 
38 
financialservices.house.gov/uploadedfiles/hhrg-112-ba16-wstate-kcronin-20120620.pdf. 
9. Incentives for broker promotion 
The SEC Report concludes: 
Main empirical finding of the academic literature: After 
decimalization, the reduction in relative spreads may have 
reduced broker incentives to promote stocks. 
We observe: 
•	 We agree. But we believe the SEC underestimates the 
magnitude of the loss in broker incentives, and how it has 
undermined the quality and breadth of distribution for IPOs: 
–	 Middle-market institutional sales departments that used 
to be commonplace on Wall Street have all been closed. 
–	 Institutional sales departments are increasingly dominated 
by hedge funds and large-cap-focused “mega” investors. 
–	 More institutional investors have become self-directed 
and are not effectively reached by Wall Street. 
–	 The majority of retail stockbrokers no longer market 
stocks as a major portion of their daily activity. 
We have studied all of the academic literature and, as we 
testified at the SEC Advisory Committee on Small and Emerging 
Companies, there are two effects. First, we conclude that the 
current market structure has significantly harmed both institutional 
liquidity and dealer market makers in small-cap stocks, as it has 
decimated the distribution and aftermarket support for the small 
IPO. Second, the academic literature shows that liquid stocks are 
made more liquid by smaller tick sizes and illiquid stocks are made 
more illiquid by smaller tick sizes. Thus, one must conclude that this 
market structure represents the “worst of both worlds” for small-
cap issuers: it harms institutional liquidity and dealers. 
An increasing number of market experts, including 
investors, are joining in the call to increase tick sizes. In fact, 
the Investment Company Institute, which represents over 90 
million retail investors, called for increases in tick sizes in its 
congressional testimony, made by Invesco in June 2012.
38 
We hope to see more forest and fewer trees. 
24 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
		 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
Eating away at the “on-ramps” 
(small investment banks) 
“The irony of all this is that the change in Order Handling Rules [in 1997] that were 
instituted under my watch at the [SEC] has resulted in the proliferation of markets, 
technologies and automation that brought about the flash crash and yesterday’s [Knight 
Securities] events. I think public confidence is severely shaken by things of this kind.” 
The U.S. IPO market has suffered a significant decline, 
particularly with respect to small companies. From 1991 to 2001, 
the number of U.S. IPOs smaller than $50 million dropped 
from nearly 80% to just 20%. This decline is the unforeseen 
consequence of the regulations enacted between 1997 and 
2001 that significantly changed the stock market structure 
that paid for the infrastructure of the small-broker dealers, 
research analysts and capital support required to take small 
companies public and to support them in the aftermarket. This 
infrastructure is analogous to the system of highways — with 
roads, on-ramps, bridges, tunnels and tolls — required to 
support commerce. 
Economic infrastructure supporting U.S. capital markets 
Stakeholders:	 
Economic incentives: 
•	 Roads — Trade execution 
•	 Tolls — Tick sizes and 
venues such as NYSE, NASDAQ, 
commissions that support the 
Direct Edge, Liquidnet 
market’s operations and upkeep 
•	 On-ramps — Investment banks 
•	 Bridges — Market makers 
(firms ready to buy/sell stocks 
continually) committing capital 
•	 Tunnels — Analyst and broker 
support to investors 
Arthur Levitt, former chairman of the SEC 
Bloomberg Surveillance with Ken Prewitt and Tom Keene 
August 2, 2012 
If tolls were cut and roads, on-ramps, bridges and tunnels 
were allowed to deteriorate, the cost to get goods to market 
would increase. Likewise, with the loss of tick sizes and 
commissions (the tolls), the stock market infrastructure has 
deteriorated, and public company management is left to pay the 
increased implicit cost of supporting liquidity in its shares — a 
burden many companies are unable to bear. Higher tick sizes 
would enable management to focus on growing the business 
instead of trying to find investor support for its publicly traded 
shares. 
Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 
The trouble with small tick sizes 25 

  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                                                      
                                                                                                                                                         
        
                                                                                                                                        
 
Tragic consequences for the cottage industry of on-ramps 
that once supported entrepreneurs 
A series of uncoordinated regulatory changes aimed at cutting 
transaction costs has led to a number of negatives — not only 
for small companies and the small broker-dealers and long-term 
investors that supported them, but also for the U.S. economy. 
Since 2001, 1-cent tick sizes no longer sustain the traditional 
market structure that helped numerous small companies issue 
IPOs. Investment banks acting as bookrunners — whose 
numbers, as of 2006, had decreased 77% to only 39 firms — 
today lose money supporting small company IPOs in the 
aftermarket. As a result, only 233 small companies issued IPOs 
between 2001 and 2007 — a 92% drop from 1991–1997 levels. 
Moreover, small company IPOs now represent only 20% of the 
total IPO market. 
Decimalization and the corresponding drop in tick sizes 
from 25 cents to 1 cent (and even sub-pennies) caused a gradual 
collapse in the infrastructure small companies need to access 
public markets, resulting in the following: 
•	 A loss of profits that paid for research, sales and trading 
support. Between 1994 and 2006, 129 investment banks, 
many of which supported small companies, exited the 
book-run IPO business — a decline of 77% over pre-1994 
levels. Because tick sizes decreased by 96%, the remaining 
investment banks dramatically cut back capital commitments 
for small company stocks, eliminating stockbrokers and 
cutting the depth and breadth of research coverage offered 
to investors. Many small companies were delisted from 
exchanges, and today, weak capital commitment from 
investment banks remains a serious impediment to small 
businesses accessing U.S. capital markets. 
•	 Market makers being replaced by high-frequency traders 
that focus on large, high-volume stocks. Only companies 
with high visibility, like Facebook and LinkedIn, whose 
brands create a demand for their shares, can survive without 
research, sales and trading support. After decimalization, 
Wall Street was forced away from serving investors in 
growth stocks and toward an increasingly narrow subset of 
very large cap-oriented and high-turnover institutions and 
hedge funds. 
Small-cap companies and capital formation 
Before               1997               After               2001               %               change               
Tick                 sizes                 $0.25                 per                 share                 $0.01                 per                 share                 -96%                 
Investment banks (acting as a bookrunner) 167 (1994) 39 (2006) -77% 
Small                 company                 IPOs                 2,990                 (1991–1997)                 233                 (2001–2007)                 -92%                 
Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 
26 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
                  
                                                                                                      
   
  
 
Eating away at IPO 
aftermarket profitability 
(support for public companies) 
Even before Regulation ATS was implemented in 1998, many 
people understood that it would gut the U.S. IPO market. 
In a letter dated February 4, 1997, addressed to NASDAQ’s 
then-president and copied to the SEC chairman, the SEC 
chief economist and the chairman of the National Association 
of Securities Dealers, Knight Securities co-founder Walter 
Raquet warned: 
“Remember you are tampering with the 
most efficient capital-raising and job-
creating mechanism in the world — the 
NASDAQ Stock Market.” 
Investment banks, like all corporations, are ultimately driven 
by simple economics. They invest and engage in profitable 
activities, while seeking to reduce participation in those activities 
that are unprofitable or insufficiently profitable to justify the 
investment and risk exposure. 
For decades, the business of marketing, executing and 
supporting IPOs of all sizes was a consistently profitable venture 
for banks. Today, in a world in which tick sizes have been 
decimalized and decimated, banks can ill afford to commit human 
and capital resources to what used to be the vast majority of IPOs 
in this country, i.e., those with proceeds less than $50 million. 
While it may be tempting for contrarians to focus on the 
gross spread of the transaction — which has remained generally 
stable at 6% to 7% of total proceeds for most IPOs — this 
position ignores the economic reality of what the destruction 
of tick sizes has wrought. In fact, the majority of an investment 
bank’s profit from an IPO once occurred after the transaction 
itself, from the trading and commissions generated by actively 
supporting the stock in the aftermarket (see Exhibit 7). 
Prior  to 1998 and the implementation of Regulation ATS, 
small IPOs — those under $50 million — comprised 80% of 
all IPOs. Banks competed fiercely for this market segment 
— not just for their 7% but also for the revenue achievable in 
the aftermarket. Deals worth $25 million, which would have 
Exhibit 7: Today’s investment banks lose money supporting small IPOs in 
the aftermarket and, as a result, provide very little ‘real’ support 
IPO economics 
1997 2007 
Deal size $25,000,000 $25,000,000 
Number of managers 2 5 
Bookrunner/senior manager’s revenue 
Transaction $840,000 $560,000 
Aftermarket $1,680,000 $(56,000) 
Total revenue $2,520,000 $504,000 
Deal size needed in 2007 to achieve 
economics equivalent to 1997 
$125,000,000 
Source: Capital Markets Advisory Partners LLC. 
generated only $840,000 in gross spread dollars, became the 
generator for twice that amount in the form of aftermarket 
trading and commission revenue. 
The aftermarket revenue has all but evaporated for deals of 
this size. Today, banks routinely lose money in the aftermarket 
on small transactions. In this penny-spread, ultralow-commission 
world, there simply isn’t enough float to generate enough revenue. 
A further complication involves the number of banks that 
could be active in the stock. Before Regulation ATS, these small 
deals would typically be managed by one or two underwriters, 
which would then be the dominant traders in the aftermarket. 
Today, even small IPOs feature several banks on the cover, all of 
which are competing for the same gross spread pie, fully aware 
that there won’t be much in the aftermarket to share. Unlike the 
conditions before tick sizes eroded, banks today recognize that 
for small IPOs, the IPO itself is the only opportunity to make 
any money. 
“Investment banks are driven by simple 
economics, and the economics simply aren’t 
there anymore in the world of small IPOs.” 
Edward Kim 
Grant Thornton LLP
 and former head of product development at NASDAQ 
The trouble with small tick sizes 27 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
	  						    			   	
					  				
					   				
 
 
 
Small-caps can’t create systemic risk 
(so why not build a small-cap market 
to drive growth?) 
“I think many of our problems with market liquidity in small- and mid-caps can be 
traced right back to decimalization [tick sizes],” said Dennis Dick, prop trader at Bright 
Trading in Detroit. “Where decimalization has helped to reduce spreads in the large-cap 
space, it has actually harmed liquidity in the small- and mid-cap space.”
 For blocks, “it’s nearly impossible to execute any sizable order without significant price 
impact,” Dick said. 
“SEC to Examine Tick Size for Small Caps”
 
John D’Antona Jr.
 
Traders Magazine Online News
 
April 17, 2012
 
Small public companies, defined as those with under 
$2 billion in equity market value, while very large in number 
(81% of all public companies) represent only 6.6% of total 
equity market value (see Exhibit 8, page 29). In fact, if we look 
at the progressively smaller slice of companies that are micro-
cap (less than $500 million in size), we discover that again, while 
large in number (nearly 68% of all small public companies), these 
companies represent only 1.6% of total market value. The subset 
of the market that has been hurt the most is the sub-$100 million 
market value or nano-cap companies. These issuers represent 
more than half of all public companies (52%, including the 
over-the-counter market), and yet account for only 0.33% of the 
total equity market value in our U.S. stock markets. 
What can be presumed by the small aggregate value of small 
public companies? 
•	 As a class, small public companies pose no systemic threat to 
the U.S. economy. Thus, 
•	 small public companies should have a regulatory burden that 
is cost appropriate for their size, and 
•	 higher transaction costs and incentives to support this market 
will not do significant harm to consumers and, indeed, by 
helping to drive the economic and job growth that so many 
of these companies create, will likely do consumers a great 
deal of good. 
28 The trouble with small tick sizes 

   
Exhibit 8: While 81% of all public companies are sub-$2 billion in market value... 
Percentage of total number of listed companies 
100% 
80% 
60% 
40% 
20% 
0% 
52.0% 
81.1% of listed companies 
15.6% 
12.5% 
6.4% 
13.5% 
Nano-cap Micro-cap Small-cap Mid-cap Large-cap 
(sub-$100 million) ($100 million to $500 million) ($500+ million to $2 billion) ($2+ billion to $10 billion) ($10+ billion) 
...sub-$2 billion companies represent less than 7% of total public company market value 
Percentage of total public company market value 
100% 
80% 
60% 
40% 
20% 
0% 
0.3% 
6.6% of total market value 
1.3% 
19.1% 
74.3% 
5.0% 
Nano-cap Micro-cap Small-cap Mid-cap Large-cap 
(sub-$100 million) ($100 million to $500 million) ($500+ million to $2 billion) ($2+ billion to $10 billion) ($10+ billion) 
Sources: Grant Thornton LLP and Capital IQ.
 
Includes NASDAQ, NYSE (including AMEX) and OTC listings. Corporate issuers only, excluding holding companies, funds, MLPs, SPACs, REITs and other trusts.
 
The trouble with small tick sizes 29 

  
 
 
   
 
 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
   
The effective representation of 
corporations (the job creators) 
was destroyed 
“Taxation without representation is tyranny!”
39 
The JOBS Act is a modern-day American Revolution — 
corporations lost their seat at the table in the structuring of stock 
markets, evidence mounted that stock markets were harming 
issuers (job creators), and concerned Americans raised their 
voices to the White House and Congress. Our government 
responded: a tea party ensued in the form of the JOBS Act. Like 
the Boston Tea Party, the full impact of this one will not be 
known for years. 
The fact remains that the interests of small and large 
corporations are no longer well-represented to and within the SEC 
— at least not within the Division of Trading and Markets. Why? 
Let’s start with the notion that issuers are not concerned 
with understanding market structure. It isn’t their forte. Up until 
1998, the SEC’s Division of Market Regulation (now known 
as the Division of Trading and Markets) heard mostly from the 
NYSE, NASDAQ and the American Stock Exchange (AMEX). 
Each of these stock exchanges
40
 was, at the time, a member-
owned organization. As part of its governance and culture, each 
of these institutions represented the interests of its constituencies 
(i.e., listed companies, investors and member firms, including 
investment banks, market makers and specialists) to the SEC and 
on Capitol Hill. 
However, with the passage of Regulation ATS, that 
exchange-led representation of issuers to the SEC was, we 
believe, largely overshadowed by the proliferation of new, 
trading-only entrants. For example, there are now 29 so-called 
dark pool trading venues, and 14 exchanges and ECNs tracked 
by the Tabb Group’s April 2012 LiquidityMatrix.
41
 Of the 14 
exchanges and ECNs, five trace back to the NYSE, NASDAQ 
and their owned entities. That still leaves a large plurality of 
venues whose primary interest is creating and capturing more 
trading volume (e.g., proliferation of ticks). 
To make matters worse, we would argue that the major stock 
exchanges (NASDAQ and NYSE) were forced by regulatory 
changes to abandon membership-owned, nonprofit structures 
and convert to for-profit stock-based ownership — NASDAQ in 
2000 by Regulation ATS and the NYSE in 2005 (reverse merger 
with Archipelago) by Regulation NMS. Thus began the modern 
era in which member firms opened dark pools to compete for 
trading volume against the listed exchanges, and new trading-only 
venues emerged that offered no listing benefits for issuers. While 
the NYSE and NASDAQ try their best to represent issuers, it 
is a common tactic for the nonlisted trading venues and high-
frequency trading firms to portray, with the SEC and Congress, 
the exchanges’ efforts as self-serving. From where we sit, this 
marginalization and underrepresentation of corporate issuers is a 
construct that the United States can ill afford. 
39
 The quote is commonly attributed to Massachusetts lawyer and political activist James Otis, Jr. c. 1761. 
40
 NASDAQ was not technically granted “exchange” status by the SEC until 2006. While NASDAQ was generally thought of by the public as a stock exchange, the term legally requires status 
as a self-regulatory organization. 
41 
www.tabbgroup.com/Page.aspx?MenuID=47&ParentMenuID=2&PageID=46. 
30 The trouble with small tick sizes 

   
  
 
 
 
 
 
 
 
 
 
 
 
		
	
	
	
	
	
		
                                                            
	
	
		
	
		
	
		
	
		   		
	   		
	
		
Investors now face U.S. capital markets that are more 
complex, opaque and volatile than ever before. 
•	 Greater complexity and volatility that undermine investor 
confidence: The U.S. stock markets were once dominated by 
three stock exchanges (NYSE, NASDAQ and AMEX) that 
focused on investing and capital formation. The markets are 
now fragmented across 60 different venues focused primarily 
on trading. 
•	 Increase in high-frequency trading: Lower tick sizes have 
led to increased market speculation, dark pools and high-
frequency trading — from approximately 10% of daily 
U.S. trading in 2000 to more than 60% today. Rather than 
supporting long-term company growth by bringing research, 
sales and capital to investors, high-frequency traders seek 
to make a quick profit by identifying short-term price 
discrepancies. 
Winners Losers 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
Speculators 
Big investment banks 
Hedge funds 
Day traders 
Electronic trading 
Volatility 
Trading-oriented institutions 
Dark pools 
Big company acquirers 
Asia 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
Small companies 
Entrepreneurs 
Private enterprise 
Small investment banks 
Venture capital 
Market makers 
Stockbrokers (advice) 
New issue distribution 
Equity research 
IPOs 
•	 
•	 
•	 
•	 
Institutional liquidity in small-cap stocks 
Transparency in small-cap stocks 
Long-term investors 
The United States 
The trouble with small tick sizes 31 

  
 
 
 
 
 
							    	
 
 
				    		   	    	
 
				   			
 
				  			   		
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
Why some large investment banks, 
large investors and stock exchanges 
fight for smaller tick sizes, despite 
their negative impact on the economy 
Some large investment banks: Most large investment banks 
derive significant revenue from some combination of businesses 
that benefit from smaller tick sizes. These are likely to include: 
•	 dark pools (internalization trading markets that depend on 
sub-penny executions and rebates that further cut effective 
tick sizes below their regulated minimum quote level of one 
penny per share), 
•	 algorithmic trade execution (described by some as an 
“electronic wood chipper” that takes block orders of 100,000 
shares or more and cuts them into 100-share increments), 
•	 sponsored access (where high-frequency or other aggressive 
trading customers use the investment banks’ pipes to directly 
access the stock market for faster trade executions), and 
•	 prime brokerages (where money is lent mostly to hedge 
funds to short — and sometimes acquire — securities). 
Some large investors: One of the authors has been in meetings 
with the senior management of large investment firms where 
they have confided that, because they have the scale to 
employ their own research analyst staffs, lower tick sizes and 
commissions benefit them competitively by depriving their 
smaller competitors of shared services from the Wall Street 
firms. As a result, they will tolerate higher volatility in and 
erosion of the overall market and economy because they believe 
that they have a competitive advantage in these increasingly 
opaque markets. In addition, major index, exchange-traded fund 
and basket trading shops unquestionably benefit from lower 
execution costs, especially since they do not require equity 
research or sales services in the traditional sense. 
Some stock exchanges: When many of your customers are high-
frequency traders that depend on smaller tick sizes, it is difficult 
to take a broader market position against penny tick sizes 
without harming your revenue. For this reason, the listed stock 
exchanges are in a precarious position. 
The vast majority of high-frequency trading is confined 
to large- and mid-capped stocks. It is for this reason that we 
think it should be easy for Congress, the SEC, stock exchanges, 
investment banks and perhaps even the high-frequency trading 
community to reach an accommodation in the small-cap 
segment. As mentioned in a previous section, while this sub-$2 
billion public company sector represents over 80% of public 
companies, it comprises less than 7% of total market value. 
This was the rationale behind The Wall Street Journal op-ed 
published on October 27, 2011, titled “How to Revive Small-
Cap IPOs: A new, parallel market can provide the critical 
support companies under $2 billion in value need to go public.”
42 
One concern expressed by entrepreneurs about listing 
their company on a newly formed stock market is the fear of 
being stigmatized if they choose a new, unbranded market. For 
this reason, any new market would be better accepted under 
the umbrella of one of the major listed brands (e.g., NYSE or 
NASDAQ) than it would if it were to go it alone. Alternatively, 
if all companies were given a choice over their own tick sizes 
(or an algorithmic way of determining optimal tick sizes was 
instituted), there would be no risk of “stigma,” and there could 
be one market with one regime of mass customization. 
42
 online.wsj.com/article/SB10001424052970203554104577001522344390902.html. 
32 The trouble with small tick sizes 

   
 
 
		  	 		   		 	   	 	  	
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
  
  
 
 
Beware of the hidden agendas of 
those who champion smaller tick sizes 
As a result of our past studies (e.g., Why are IPOs in the ICU? 
A wake-up call for America, Market structure is causing the IPO 
crisis — and more), we are continually engaged in discussions 
with current and former regulators, securities attorneys, 
politicians, economists and industry executives. We have learned 
much from these discussions, including that there may be 
hidden agendas for pushing for smaller tick sizes when it seems 
that the evidence is in: small tick sizes, applied to all stocks, are 
undermining U.S. markets and with them, capital formation, job 
growth and the U.S. economy. 
The following is a list of arguments and hidden agendas that 
may help to explain why some people will argue that smaller tick 
sizes enhance liquidity for small-cap stocks (the stock market 
version of “black is white”): 
•	 To eliminate sales: Smaller tick sizes eliminate the incentive 
for stockbrokers to market stocks to investors. By 
eliminating sales incentives, some hope to eliminate sales 
practice abuses. 
The  hidden agenda: To eliminate sales practice abuses (we 
believe, however, that vigilant enforcement is the proper way 
to address these abuses). 
•	 To eliminate small public companies: Smaller tick sizes 
make it difficult for small companies to go public. Because 
small companies fail at higher rates than large companies, 
investors are protected from these failures. 
The hidden agenda: To keep small companies from 
going public. 
•	 To be right: Some market participants are likely to resist 
admitting that well-intended market structure changes 
such as the Order Handling Rules in 1997, Regulation 
ATS in 1998 and Decimalization in 2001 might have had a 
catastrophic impact on the U.S. economy. 
The hidden agenda: No one likes to admit that he or she was 
wrong. It takes courage to stand up and correct past mistakes. 
However, we are hopeful that those who are in a position 
to advocate for these rule changes will follow the example 
of some, including former chairman and CEO of Citigroup 
Sandy Weill (on the repeal of Glass-Steagall) and former SEC 
Chairman Arthur Levitt (on the unintended consequences of 
the Order Handling Rules), and begin the process of bringing 
our IPO market back to its former level — one that made the 
United States the envy of stock markets throughout the world. 
•	 To serve special interests: Many market participants benefit 
from smaller tick sizes, which proliferate the number of 
price points in which stocks trade, thereby increasing trading 
complexity and large-cap volume, and increasing their 
potential to profit even at the expense of the economy. 
The hidden agenda: Special interests lobby to change market 
structure in ways that will increase their profits. 
•	 To “protect” consumers: Some market participants blindly 
support the merits of low-cost trading, not appreciating the 
harm that is actually inflicted upon investors. The march 
toward ever-lower costs has, in fact, deprived the markets of 
adequate economic incentives to support capital formation 
and economic growth. This, in turn, undermines consumers 
by eroding investment returns, job growth and tax revenues 
required to sustain public services (e.g., education, sanitation, 
and fire and police protection). 
The good news is that more and more people are coming 
around to the view that small tick sizes are making a wasting 
asset of the U.S. stock markets. 
We believe that it is only a matter of time before reason 
prevails and market structure enhancements are implemented 
to reverse the more than decade-long decline in primary capital 
formation. 
The trouble with small tick sizes 33 

  
 
 
 
  
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
  
  
 
 
 
 
 
 
 
  
   
 
Tick sizes: The academic perspective 
and international practices 
Academic approaches offer hints, but fall short 
Micromarket economists tend to focus on changes in liquidity 
(or other metrics) around specific events over relatively short, 
measurable time frames. Yet, as Professor Robert Schwartz
43 
pointed out at his annual Financial Markets Conference in 
New York: 
“Markets are still adjusting to regulatory 
changes like the Order Handling Rules 
and Regulation ATS that were made over a 
decade ago.” 
While most of the public sees the stock market as simply the 
NYSE and NASDAQ, in fact, the stock market is defined by the 
totality of market participants — brokerage firms, institutional 
and retail investors, large and small investment banks, sell- and 
buy-side research analysts, traders and trading venues — without 
which markets cannot function. This is what we refer to as 
the stock market ecosystem, and we believe that only from an 
examination of the long-term decline in the ecosystem, coupled 
with a qualitative analysis of how short-term measurable effects 
from micromarket structure changes could have led to this 
decline, can legislators and regulators fully understand how the 
proliferation of ticks (decrease in tick sizes) could have eroded 
primary capital formation, economic growth and job formation. 
In the 1980s and 1990s, it was generally accepted and 
appreciated by stock exchange officials at NASDAQ and the 
NYSE that large-cap stocks would subsidize the research, 
sales and trading support required by smaller-cap stocks in the 
interests of capital formation and economic growth.
44 
In fact, the 
NYSE went as far as to allocate small-cap stocks to the specialist 
booths of firms making markets in large-cap stocks. The quid 
pro quo for permitting these specialist firms to earn excess 
profits on large-cap stocks was the expectation that they would 
subsidize small-cap stocks. It was also understood that large-cap 
stocks and higher spreads would create flows to broker-dealers 
that would allow them to carry the standing infrastructure of 
salespeople, research analysts and traders needed to subsidize 
small-cap liquidity between “IPO windows.” Thus, the cash 
equities business was seen as a break-even business until the IPO 
window would open and generate profits and bonuses for Wall 
Street personnel. 
The higher profits derived from higher tick sizes and bankable 
spreads created a profit opportunity that incentivized Wall Street 
firms to maintain larger sales forces that would cover more 
institutional and retail investors. This larger sales and marketing 
capability supported volumes of high-touch sales calls to a broad 
range of investors that educated investors and created recognition, 
appreciation and a market for less well-known stocks. 
So, what happened? We believe that the NYSE had a viable 
model in the form of large-cap stocks subsidizing small-cap 
liquidity, and NASDAQ had a viable model in the form of large 
tick sizes and trading spreads enjoyed by the dealer community 
that enabled enough profitable aftermarket trading for dealers 
to cause them to steer IPOs in NASDAQ’s direction. The 
AMEX, however, did not have a viable model to adequately 
subsidize and support small-cap companies in the aftermarket. 
43 
Baruch College’s Marvin M. Speiser Professor of Finance and University Distinguished Professor of Finance at the Zicklin School of Business. 
44	 
Conversations, over the past two years, between David Weild and Richard Grasso, former chairman and CEO of the NYSE, and Richard Bernard, former general counsel for the NYSE and 
a member of the International Stock Exchange Executives Emeriti (ISEEE). 
34 The trouble with small tick sizes 

   
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
   
   
 
Today, in the wake of decreasing tick sizes, these subsidies have 
been eliminated, which has caused a wholesale decline in this 
standing infrastructure. The decline in the IPO market is directly 
attributable to the decline in the standing infrastructure including 
sales, research, capital commitments and smaller investment banks. 
Section 106(b) of the JOBS Act asks a long-term question: 
How did the “transition to trading and quoting securities in 
one-penny increments, also known as decimalization...impact... 
the number of initial public offerings since its implementation 
relative to the period before its implementation?” A firm 
answer to this question appears to be beyond the purview of 
micromarket economics, which seems focused on analyzing 
the impact of a structural change to market structure over 
short periods of time on stock trading, and not considering 
the cumulative effect of multiple changes on the broader stock 
market ecosystem that include a wide variety of changing 
participants from research analysts and salespeople to traders. 
We liken the increasing recognition that the proliferation of 
ticks undermines markets broadly to the revelation that tobacco, 
which for hundreds of years was thought to be a cure-all,
45 
causes cancer. 
Inconclusive benefits and unintended consequences 
Academic research conducted on the impact of tick size 
reductions on different global markets has generally concluded 
that large companies — which tend to be very liquid, have 
recognized brand names and trade at higher prices — are helped 
by decreases in tick sizes. Tick size reductions for these types 
of companies have improved their market quality by tightening 
spreads and attracting new market participants, therefore 
benefiting investors by lowering transaction costs and increasing 
the number of liquidity providers.
46 
These benefits diminish or disappear altogether, however, for 
smaller, less-liquid companies. Decreased tick sizes and spreads 
have decimated return potential and increased risk exposure for 
market makers, which now lack economic incentives to support 
these small-cap stocks and have generally reacted by cutting the 
resources that once supplied this support. 
While continually decreasing tick sizes has arguably benefited 
large-cap investors in the short-term — due to improved bid-
ask spreads at the expense of small-cap companies and market 
makers — its overall impact on capital formation and economic 
health is largely unstudied and therefore, unknown. There is also 
significant debate regarding what constitutes the optimal tick size 
that will benefit all market participants, with academic research 
suggesting that it is improbable that an ever-diminishing, one­
size-fits-all approach will be beneficial to companies of all sizes. 
If tick sizes continue to decrease, the technological demands on 
the trading infrastructures and data systems of all markets will 
continue to proliferate as the number of quotable increments 
expands exponentially, trading becomes riskier and complexity 
intensifies — all at no gain to investors or public companies, and 
possibly to the detriment of the global economy. 
45 
academic.udayton.edu/health/syllabi/tobacco/history.htm#begin. 
46 
This finding is repudiated by other academic studies, however, that find that new market participants in the form of unconstrained high-frequency, algorithmic traders actually decrease liquidity and 
increase trading costs and stock price volatility. 
The trouble with small tick sizes 35 

  
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
  
							
							
 
 
 
Variations in international tick size rules 
Broadly speaking, worldwide tick size standards are classified 
as either static or dynamic. A static tick size regimen is based 
on a single fixed value that applies to all quotes in a security, 
regardless of its stock price, market float or any other size or 
liquidity measurement. The United States is one example of a 
static regimen. 
In contrast, a dynamic tick size schedule allows the price 
increment to vary by moving it up or down along a sliding scale 
depending on a range of values — typically price per share, as it 
is easily measured. As market participants enter quotes into an 
order book, each price is assessed against an approved tick size 
matrix to determine the appropriate increment. Countries that 
employ dynamic tick size regimens have overwhelmingly chosen 
to base them solely as a function of a share price’s variation, 
which, like static regimens, fails to adequately account for a 
company’s market float, liquidity and trading volume, among 
other characteristics. Effective tick size regimens should optimally 
be customized to the characteristics of each public company, 
and computer technology is now at the point where mass 
customization of tick sizes could be cost-effectively achieved. 
Whether countries choose to employ static or dynamic tick 
size standards, the relative tick size
47
 under both regimens is now 
almost always universally small — typically occurring between 
five and 10 basis points,
48
 regardless of a company’s share price 
(see Appendix C: Tick size standards around the world, page 52). 
The race to the bottom 
Despite a recognized need to harmonize tick size standards 
across trading venues, competitive pressures have led most global 
stock markets to carry out significant decreases in tick sizes in 
recent years. Plagued by a proliferation of entrants, including 
alternative trading platforms and market participants employing 
ultrafast algorithmic trading practices, many exchanges have 
been forced to add granularity and reduce their pricing grids in 
order to defend their territory (and profits). 
While all of this activity may improve an exchange’s 
competitive position by driving increased trading volume, the 
academic research seems to suggest that it is happening at the 
detriment of other market participants, most notably small, less-
liquid companies. 
The literature shows that smaller tick sizes hurt liquidity for illiquid stocks: 
•	 Illiquid stocks are harmed by smaller tick sizes. 
•	 Liquid stocks are helped by smaller tick sizes. 
But, not so fast! What are the long-term effects of smaller tick sizes on the
 
ecosystem?
 
Answer: They degrade stock market infrastructure and capital formation, and 
undermine the economy. 
47 
Based on tick size as a percentage of price per share.
 
48 
Based on the minimum and maximum relative tick size statistical mode.
 
36 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
			
	
		
	
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
							
							
			
		
   
 
Recommendations and conclusions
 
“Larry Tabb, chief executive of the Tabb Group, said dime spreads shouldn’t be off the 
table and [should be] considered as well. This, he added, would incentivize brokers to trade 
and provide research for smaller and new companies. 
“[Professor James] Angel believes issuers, not the regulators, should decide what the 
spread should be in stocks. But if a company trades better with sub-penny pricing, ‘then 
sub-penny should be permitted.’” 
The JOBS Act, Part 2 (issuer choice) — make stock markets 
work for issuers (employers) again 
SEC-driven regulatory changes beginning back in 1996 ushered 
in an age of intense competition and innovation for investor (and 
trader) order flow in public equities. However, as a result of 
Regulation NMS, which permitted all trading venues to compete 
for trading in all listed securities, issuers were deprived of their 
only choice in market structure as it impacted their shares, i.e., 
the dealer versus specialist system. Today, it does not matter 
whether issuers list on the NYSE, NASDAQ or the NYSE 
AMEX (and in the future, BATS and Direct Edge), because they 
have no control over how their stock is traded and, in turn, no 
ability to significantly influence the level of: 
•	 speculative versus investment activity, 
•	 research coverage, 
•	 sales support, or 
•	 capital commitment. 
“Wider Spreads and Fees Could Help Restore Investor Confidence”
 
John D’Antona Jr.
 
Traders Magazine Online News
 
June 1, 2012
 
We propose a very simple change to empower the boards of 
directors of public companies to optimize the market for their 
shares by giving them the authority to establish the tick size in 
the trading of their stock by a simple majority vote of their board 
of directors. 
The current penny-or-less tick size has created near-
frictionless trading that induces speculative trading in large-cap 
stocks and removes the economic incentive for traders to provide 
liquidity, and for research analysts and brokers to create order 
flow in small- and micro-cap stocks. 
If issuers of all market value sizes were able to choose a tick 
size from a range that is no less than one penny and no more than 
5% of their share price, they would be able to customize their 
tick size in a way that they determined was in the best interests of 
the market for their shares.
49
 This would allow issuers to optimize 
their access to capital, support and volatility by: 
•	 providing adequate incentives for equity research coverage, 
•	 providing adequate incentives for capital commitment and 
market making, 
•	 encouraging investment activity, and 
•	 discouraging speculative activity. 
49 
The SEC will also need to control rebates and executions within the spread in order to keep volume from migrating to dark pools and to prevent siphoning off of revenue intended to fund the value 
components of research, sales support and capital commitment. 
The trouble with small tick sizes 37 

  
  
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
		   			   					
 
					    			  	
A healthy discussion would be entered into by the issuer, 
investment banks, market makers and investors to determine 
what the optimal market structure, as defined by tick size, might 
be — is it 1 cent, 5 cents, 10 cents, 20 cents, $1 or something else? 
“Issuer choice” tick size implementation table 
Stock price per share 
Tick size range 
Relative tick size range* 
< 1.00 
0.0001 to 0.049995 
0.01% to 5% 
1.00 to 4.99 
0.01 to 0.2495 
0.2% to 5% 
5.00 to 9.99 
0.01 to 0.4995 
0.1% to 5% 
10.00 to 49.99 
0.01 to 2.4995 
0.02% to 5% 
50.00 to 99.99 
0.01 to 4.9995 
0.01% to 5% 
≥ 100.00 
≥ 0.01 
≤ 5% 
*Tick size as a percentage of price per share.
 
Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC.
 
Alternatively, policymakers could automate the mass 
customization of tick sizes via an algorithm that establishes 
increments at one-half of the average quoted spread of a stock 
over some defined period of time, e.g., trailing 12 months. 
Stock exchanges increasingly acknowledge that today’s market 
structure is effective only for a small minority of innately liquid, 
mostly large-cap stocks, and that higher-priced and less-liquid 
stocks could benefit from higher tick sizes, while lower-priced 
and extremely liquid stocks could benefit from smaller tick sizes. 
For example, a stock that trades with a quoted spread of 20 
cents might have a tick size of 10 cents (two increments within 
the natural spread). For a stock whose quoted spread is 1 cent 
per share, the tick size might be one-half of 1 cent (two sub-
penny increments). The division in two of natural spreads is 
based on history. In the early 1990s, when quote spreads were 
generally 25 cents per share, most stocks traded in tick sizes 
of 12.5 cents. There were two ticks within the quoted spread, 
and capital formation for small businesses thrived. Academics 
have generally reported that small-cap stocks have not generally 
experienced a decrease in spreads, so a two-tick increment may 
best simulate the market-making incentives of the early 1990s, 
when small company capital formation thrived. However, 
further study may be needed to determine the optimal number 
of ticks. Trading-oriented entities should argue for smaller 
tick sizes (more ticks) and investment-oriented entities should 
argue for larger tick sizes (fewer ticks) including only one tick 
equivalent to the natural quoted spread. The NYSE, NASDAQ 
and BATS have jointly petitioned the SEC to request smaller 
ticks in very liquid, low-priced companies. Market participants 
have suggested that the logical extension of this request would be 
allowing larger tick sizes for illiquid and/or high-priced stocks. 
These two recommended alternative solutions may be used 
individually or in combination. In the instance where the issuer 
choice alternative is used, for issuers that have not affirmatively 
made a choice in tick size, there might be a default option. That 
default option could be fulfilled by algorithmic customization of 
the issuer’s tick size. 
Congress can require the SEC to implement such systems 
across all trading venues, or the SEC could simply enact its 
own rule. Because these changes necessitate only a simple 
programming change, these capabilities could be implemented 
very quickly and cost-effectively by all trading venues. The 
SEC could appoint a central administrator (e.g., the SEC, the 
DTCC or FINRA) of tick sizes, which would then be published 
to the market. These improvements in market structure would 
also allow the retention of current major trading regulations 
including the Manning Rule, the Order Handling Rules, 
Regulation ATS and Regulation NMS. 
When tick sizes are increased, the SEC and Congress must 
ensure that: 
•	 trading cannot be moved offshore to quote within the tick 
size and, therefore, doing offshore what you cannot do in the 
United States; and 
•	 rebates and other sharing arrangements do not make a 
mockery of the incentives intended by increases in tick sizes. 
38 The trouble with small tick sizes 

   
  
 
 
		   				    			  		
		   			   			   			
		   	
		
	   	  						
 
 
					
		
					
 
 
 
  
					
			   				
										
			    				   		
 
		
	
		
		
		
		
							
		
		
						
		
		
		
			
			
		
		
		
	
		
			
			
		
		
We prefer, for market confidence reasons, a simple structure 
where everyone — institutional and retail — pays the same tick 
increment. 
Broad benefits 
We believe there would be broad benefits for the U.S. economy 
because an issuer-selected tick size regimen would: 
•	 be supportive of job creators (issuers) by giving them a voice 
and a seat at the table; 
•	 be likely to induce growth in the ecosystem to support small 
companies, IPOs, investments and job growth; 
•	 be simple to implement; 
•	 be highly cost-effective; 
•	 usher in a healthy discussion among issuers, investment 
banks, research analysts and investors as to what constitutes 
an optimal market structure for different types of public 
companies; 
•	 create choice for issuers and investors; 
•	 dampen volatility; and 
•	 promote investment activity over speculative activity. 
Trial and implementation 
The JOBS Act requirement for the SEC to study the impact 
of decimalization on U.S. capital markets is an important first 
step in opening the dialogue regarding small company market 
structure concerns. 
We urge the SEC to also consider how public companies of 
all sizes would benefit from higher tick sizes, which will: 
•	 expand research, sales and trading support; 
•	 raise the visibility of less-liquid companies, thereby 
expanding investors’ pool of opportunities; 
•	 favor investors and stock pickers over short-term traders 
and indexers; and 
•	 increase investor confidence by reducing the number of price 
points at which stocks are traded and by limiting computer 
trading behaviors. 
Larger tick sizes will improve investor confidence, capital formation and job growth 
Large-cap stocks (naturally liquid) Small- and micro-cap stocks (naturally illiquid) 
Smaller tick sizes
•	 Cut order depth 
•	 Increase liquidity 
•	 Increase stepping ahead/gaming 
•	 Increase quote flickering 
•	 Undermine investor confidence 
•	 Decrease order depth 
•	 Decrease (hurt) liquidity 
•	 Increase stepping ahead/gaming 
•	 Discourage marketing (sales) support 
•	 Discourage active research support 
•	 Discourage capital commitment 
•	 Undermine investor confidence 
Larger tick sizes
•	 Increase order depth 
•	 Decrease liquidity (but stocks are still extremely liquid) 
•	 Limit stepping ahead/gaming 
•	 Decrease quote flickering 
•	 Improve investor confidence (market seems more transparent) 
•	 Increase order depth 
•	 Increase liquidity 
•	 Discourage stepping ahead/gaming 
•	 Encourage marketing (sales) support 
•	 Encourage active research support 
•	 Incentivize capital commitment 
•	 Improve investor confidence 
Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 
The trouble with small tick sizes 39 

  
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
 
  
The SEC should initiate a pilot program to let companies 
of all sizes choose their own tick size, following parameters 
determined by the SEC. This program would examine larger 
tick sizes in a significant (hundreds) and representative (share 
price, volume, market value, etc.) sample of stocks. Managements 
and their boards must become engaged in the market structure 
debate so that they can understand the linkage between market 
structure and its impact on their shareholders. What better way 
to do this than to give issuers control over their own tick size? 
During the pilot program, the SEC would also be able to 
gather valuable research and data to inform the debate on how 
to best structure the U.S. capital markets to support capital 
formation and job growth. The SEC could then evaluate the 
impact of different tick sizes on 1) the pricing and trading patterns 
of companies with different liquidity profiles, and 2) how these 
patterns vary across specific industries and company sizes. 
It must be acknowledged that while a pilot program would 
generate valuable data on the impact on short-term liquidity in 
these stocks, it will not enable the SEC to gauge the magnitude 
of commitments that Wall Street might make if it were certain 
that the size and scope of tick size increases would be made 
permanent. For example, Wall Street cannot be expected to hire 
permanent equity research analysts, institutional salespeople 
or sales traders (capital committers) in response to merely 
a pilot program. If this proposal is implemented and eventually 
expanded to the entire marketplace, the SEC may want to 
examine the magnitude of new investments in research, sales, 
trading and capital committed after a two- or three-year 
period. The authors believe that these commitments would be 
significant. 
These, among other areas of study, would build upon the 
JOBS Act and help define optimum tick sizes to keep costs low 
for investors and attract the necessary infrastructure support. 
Market forces would then become the determinant of tick sizes, 
rather than the arbitrary ruling of one-size-fits-all sub-penny 
increments. The fallacy of “What is good for Exxon Mobil is 
good for issuers of all sizes” — which has served as a foundation 
for far-reaching and destructive rulemaking — has clearly failed 
the U.S. economy. 
Create an Issuer (Job Creators) Bill of Rights 
It is clear that market structure has become increasingly hostile 
to issuers. Issuers complain that stocks are increasingly correlated 
and do not appear to trade on their fundamentals; stock market 
volatility has increased; management is required to dedicate an 
increasing and sometimes alarming percentage of time to investor 
relations (IR); and who trades (long and short) in its securities is 
so opaque management is prevented from being able to prioritize 
and allocate its time effectively. 
We believe it is essential for issuers and their advocates to 
have a voice in this debate. The following “Issuer Bill of Rights” 
was compiled from a group of panelists at the annual National 
Investor Relations Institute conference on June 4, 2012, in 
Seattle, Wash., and overwhelmingly approved in a show of hands 
by more than 200 mostly IR professionals representing large 
and small public companies. The panel, titled “IR Targeting 
& Investor Trading Behaviors,” was moderated by Tony 
Takazawa, vice president of global investor relations at EMC 
Corporation. Panelists included Jason Lenzo, director of equities 
and fixed income trading at Russell Investments; Tim Quast, 
managing director at ModernIR; and David Weild, co-author of 
this study. Each of the five points was separately voted on and 
approved by the audience: 
We call on the SEC and Congress to provide issuers (job creators) with: 
1. 	Equal standing: Issuers must have equal input to the trade execution
 
community on market structure.
 
2. 	Representation: A standing issuer advisory council to the SEC made up 
of issuers and issuer advocates. 
3. 	Transparency, timeliness and completeness: Issuers deserve
 
real-time trading and ownership data of all long and short activity.
 
4. 	Choice in market structure: No more one-size-fits-all market structures. 
5. 	Market structures that encourage fundamental investment
 
strategies over trading strategies.
 
40 The trouble with small tick sizes 

   
	   	   	  	 	   	   	   	 		 	   	 	  	
  
_____________________ 
 
 
_____________________ 
 
 
 
 
 
 
 
Appendix A
 
Proposed preliminary draft legislation: The JOBS Act, Part 2 
The authors would like to thank Adele Hogan for providing the content in this appendix. 
[Suggested proposed preliminary draft for discussion purposes only] 
Calendar No. 
___ TH CONGRESS 
___ SESSION 
H.R. __________ 
IN THE SENATE OF THE UNITED STATES
 
____ __, 201_
 
Received; read the first time
 
____ __, 201_
 
Read the second time and placed on the calendar
 
AN ACT
 
To amend the Securities and Exchange Act of 1934 (the “1934 Act”) to require the Securities and Exchange Commission 
(“SEC”) to implement a plan to test whether each publicly listed company (a “Public Company”) under Sections 12 (b) or 12(g) 
of the 1934 Act should be allowed to choose to have an increased trading spread associated with its equity securities for a set 
period of time (“Customized Trading Spreads”) if such company’s board of directors deems Customized Trading Spreads to be 
desirable in order (i) to attract research coverage and broker support to the Public Company, (ii) to attract market making to the 
Public Company, (iii) to support capital-raising for the Public Company, (iv) to increase the stability of the shareholder base and 
lessen volatility in the share price of the Public Company or (v) to be otherwise in the best interests of the Public Company and 
its long-term investors. 
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, 
The trouble with small tick sizes 41 

  
 
  
 
      
 
       
   
        
        
        
        
       
 
           
       
       
       
       
       
       
       
      
    
   
    
   
      
      
     
     
SECTION 1. SHORT TITLE.
 
This Act may be cited and referred to as the ‘‘Customized Trading Spreads for a Stronger Capital Market and to Foster Business
 
and Job Growth of 201_.’’
 
SECTION. 2. CUSTOMIZED SPREADS
 
(a) 	IN GENERAL — Section 11A of the 1934 Act is amended 
(a) (1) 	    by striking the “and” in subparagraph (a)(1)(C)(iv), by replacing the period at the end of a subparagraph with a semicolon 
and by adding an “and” at the end of subparagraph (a)(1)(C)(v) 
(a) (2) 	    by inserting the following after subparagraph (a)(1)(C)(v): 
(a)(1)(C) “(vi). a mechanism for protecting investors from market conditions that, due to the unforeseen consequences 
of regulation, may artificially and unintentionally favor one type or size of company over another in the 
capital formation process, thereby limiting the investment and growth opportunities (including the ability to 
hire additional employees) of some companies whose equity securities may be or are held by investors by 
ensuring that a company registered or to be registered under Sections 13(d) or 13(g) of the 1934 Act (a 
“Public Company”) may choose Customized Trading Spreads within certain parameters to be established from 
time to time by the SEC.” 
(a) (3) 	    by inserting a new paragraph at the end of subsection 1(a)(1)(E) -­
“In consideration of the aforementioned protection of investors, the SEC shall be directed to involve the investing public, 
Public Companies, clearing and depository organizations, exchanges (including the New York Stock Exchange (“NYSE”) 
and NASDAQ), the Financial Regulatory Association (“FINRA”), member firms and other market participants as the 
SEC may deem appropriate (the “Participants”) in developing and implementing a plan allowing the boards of directors 
of companies to select for a fixed period, or periods of time to be determined, customized trading spreads, perhaps 
of $0.02, $0.03, $0.05, $0.10, $0.15 or $0.25 per share, but not to exceed 5% of share price and as ultimately 
approved by the SEC (the “Plan”), and the Plan shall consist of implementation phases for the purpose of maximizing 
the benefits and checkpoints to make any appropriate changes to minimize or avoid any unintended consequences 
related to the Plan; 
a) During the phase-in period, the SEC shall set a minimum number of Public Companies based on criteria it deems 
appropriate taking into consideration the recommendations from the Participants, to participate in the Plan; 
b) The phase-in period shall be as set by the SEC based on input from the Participants, but may take the form of 
something like the following: 
i) Phase I –— An evaluation of pricing and trading patterns by the Participants during which a minimum of 100 
equity issues listed on each of at least the NYSE and NASDAQ will quote using the Customized Trading 
Spreads in the manner outlined in the Plan; 
ii) Phase II 
42 The trouble with small tick sizes 

   
      
           
   
      
     
        
        
        
       
       
       
      
      
        
       
        
       
        
                
        
        
       
(a) approximately 500 exchange-listed equity issues will quote, and the Participants and the SEC will continue 
to evaluate the transition to Customized Trading Spreads and the Plan’s impact on the markets and the 
industry, especially as the transition and the Plan relate to capacity, liquidity, research and trading patterns; 
(b) Participants and the SEC will evaluate the results of the first two phases and determine if they are 
technically prepared for broader implementation, and what adjustments, if any, might be appropriate; 
iii) Phase III — After determining the Plan’s readiness for all markets, the Participants will recommend a full 
implementation of customized trading spreads (considering it would cause no adverse impacts to the investing 
public other than an increase in trade execution costs), and will continue to evaluate the results of previous 
phases and the industry’s transition; 
c) Participants may work separately or jointly with each other and the SEC, and commission a third party or parties
 
to perform a detailed statistical analysis of quoting and trading activity beginning with Phase I and extending through
 
the Phase-In Period.
 
d) Fallback and recovery — Participants will require specific procedures for Participant fallback.
 
i) There may be an after close-of-market fallback to $0.01 (penny) pricing as a last resort after all other efforts
 
have been exhausted for equity quoting for the phases;
 
ii) If a Participant chooses to revert from Customized Trading Spreads back to $0.01 quoting, all exchanges
 
quoting the applicable securities must agree to fallback as well;
 
iii) If a clearing or settlement entity cannot process the first day’s trading activity, the Participants trading the 

issues cleared or settled will open with the applicable Customized Trading Spreads on the following business day;
 
iv) Each Participant will submit its own procedures on how to deal with open orders on issues quoted in the
 
Customized Trading Spreads format and the circumstances under which they will revert back to $0.01 pricing,
 
subject to approval from time to time by the SEC.
 
The trouble with small tick sizes 43 

  
	   	   	  	 	   	   	   	 		 	   	 	  	
                      
                    
  
  
  
  
  
  
  
  
    
   
   
   
  
                  
                  
   
   
   
   
   
   
Appendix B
 
Proposed preliminary phase-in implementation plan 
The authors would like to thank Adele Hogan for providing the content in this appendix. 
[Suggested proposed preliminary draft for discussion purposes only] 
Commission notice: 
Implementation plan for companies to choose if they want to designate their equity securities to have an increased trading 
fee associated with them (customized spreads) in the equities and options markets 
Exchange committee on customized, stepped-up trading prices/spreads 
Table of contents 
I. Introduction 
II. Background 
III. Implementation strategy 
IV. Testing and readiness reporting 
V. Implementation phases 
A. Phase I (Limited exchange-listed issues) 
B. Phase IIA (Additional exchange-listed issues) 
C. Phase IIB (Full conversion of exchange-listed issues and/or all options checkpoint) 
D. Phase III (All markets, full implementation) 
E. Checkpoints
 1. Checkpoint I (Pre-implementation evaluation)
 2. Checkpoint II (Determine readiness for additional exchange-listed issues)
 3. Checkpoint III (Determine readiness for full implementation of exchange-listed issues and/or all options)
 4. Checkpoint IV (Determine readiness for all markets, full implementation) 
F. Post phase-in process 
VI. Fallback/recovery 
VII. Summary 
44 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Section I — Introduction 
On [_____ ___, 201_], the Securities and Exchange Commission (“Commission”) proposed for comment a plan to provide 
certain companies registered under Section 12(g) of the Securities and Exchange Act of 1934 (“Listed Companies”) with 
the option to choose Customized Trading Spreads related to their equity securities. In order for the U.S. equities markets to 
once again be a stronger vehicle for companies to raise capital and thereby create economic growth and job opportunities, 
Congress has directed the Commission to develop a plan to allow Listed Companies’ boards of directors to select an optional 
step-up in trading prices for equity securities (“Customized Trading Spreads”). Congress has directed the Commission to 
increase the ability of Listed Companies and companies that wish to become Listed Companies to access the U.S. securities 
markets and to provide more shareholder base stability. This proposal is intended to increase funding and shareholder stability 
for Listed Companies, which would allow them to create jobs and develop new products and services, while at the same time 
allowing more investors to participate in the growth opportunities of a wider range of companies with different sizes of market 
capitalization. 
When Regulation NMS and the Order Handling Rules were implemented in 2005 and 1997, respectively, the ability of companies 
with under $100 million of potential market capitalization to do an initial public offering (“IPO”) of listed required equity securities 
dropped off precipitously and has not recovered. The U.S.-registered securities market dropped from the most popular market 
in the world to the sixth-most popular for new IPOs of that size. The Commission understands Congress’ concern that investors 
should have the opportunity to invest in mid-size and small companies, particularly since many of these companies formerly 
did relatively small IPOs that probably could not take place in today’s market structure. Those small and mid-sized companies 
obtained funding and grew to be some of the largest and most prominent companies in the U.S. today, collectively employing 
hundreds of thousands of people, including such prominent companies as Apple, Intel and Microsoft. 
On [_____ ___, 201_], the Commission ordered the NYSE Euronext (“NYSE”), the Chicago Board Options Exchange Inc. 
(“CBOE”), NASDAQ Capital Market (“NASDAQ”), the Financial Industry Regulatory Authority (“FINRA”) and others (“Participants”) to 
act jointly in discussing, developing and submitting to the Commission a plan to implement (“Implementation Plan”) Customized 
Trading Spreads at a public company’s option for specified periods of time in the equities and options markets, beginning no 
later than [_____ ___, 201_], and in implementing the Implementation Plan. 
As mandated by the Commission order, this plan has been discussed with interested market participants, including the 
Securities Industry and Financial Markets Association (“SIFMA”) and its members; the Depository Trust & Clearing Corporation 
(“DTCC”) and its two operating subsidiaries, the National Securities Clearing Corporation (“NSCC”) and the Depository Trust 
Company (“DTC”); the Options Clearing Corporation (“OCC”); the Securities Industry Automation Corporation (“SIAC”); the 
Intermarket Trading System Operating Committee (“ITSOC”); the Options Price Reporting Authority (“OPRA”); the Consolidated 
Tape Association (“CTA”); and the Consolidated Quote Operating Committee (“CQOC”) (“Interested Parties”). The Participants 
submitted to the Commission a plan for a phased-in implementation of the Implementation Plan. The purpose of the phase-in 
period is to have an orderly implementation with an opportunity to confirm that there are no unintended consequences of the 
Implementation Plan. The checkpoint phases thereafter are intended to analyze how the phasing periods work. 
The trouble with small tick sizes 45 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Section II — Background 
In mid-1997, in recognition of the potential benefits to the investing public of Customized Trading Spreads for equity securities, 
the Commission urged Participants to work on the Implementation Plan. SIFMA and the equities and options markets formed a 
Customized Trading Spread Committee in [_____ ___, 201_] to develop a Customized Trading Spread implementation plan and 
coordinate a smooth transition. 
Section III — Implementation strategy 
The Participants recommend a phased-in implementation, consisting of three phases, for the conversion to the new choice 
of Customized Trading Spreads that reduces the risk to the investing public, issuers, Participants, clearing and depository 
organizations, and member firms. This implementation period (“Phase-In Period”) will begin on [_____] and will end with full 
implementation for all equities and options on or before [_____]. 
The Participants believe a phased-in implementation is the most effective way to ensure that markets continue to operate in 
an efficient, orderly and fair manner, while mitigating the risk of fallback, and allows Participants to determine the impact of 
Customized Trading Spreads on trading rules and the intermarket system’s capacity during historically high-volume times (e.g., 
option expirations, triple witching). 
In order to mitigate the risk to the investing public of trading and quoting message rates that could possibly overwhelm 
industry capacity, thereby producing stale information, the Participants recommend that during the Phase-In Period, a minimum 
participation in the number of companies and a set schedule of pricing choices for quoting should be applied and continued 
through the last day that this Implementation Plan is in effect. 
The recommended pricing choices schedule from which companies may choose for quoting in their equity securities is as follows: 
For equity issues (not to exceed 5% of share price): $0.01 pricing choice, $0.03 pricing choice, $0.05 pricing choice, $0.10 
pricing choice and $0.25 pricing choice 
For option issues quoted under $3 a contract: $0.05 pricing choice 
For option issues quoted at $3 a contract and greater: $0.10 pricing choice 
The Participants agree to abide by the schedule above while the Implementation Plan is in effect. 
The Participants may work separately and/or jointly, and may commission a third party or parties to perform a detailed 
statistical analysis of quoting and trading activity beginning with Phase I (limited exchange-listed issues) and extending through 
the Phase-In Period. For Phase I and Phase IIA (additional exchange-listed issues), the Participants will agree on the equity 
issues (and options on those equities). The result of the study or studies will form the basis for the Participants’ study or 
studies on systems’ capacity, liquidity and trading behavior, which is due to the Commission no more than 60 days after full 
implementation, (on or before [____]) of the new choices of Customized Trading Spread pricing. 
Importantly, at the end of the Phase-In Period, the price choices described above will remain in effect through the last day that 
this plan is in effect — until the Commission approves rules for each Participant that designate the minimum increment by which 
equities and options are quoted, or until any other date identified by the Commission. The Participants’ implementation project 
schedule and milestones can be found in Appendix A. 
46 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Section IV — Testing and readiness reporting 
The Participants have discussed their readiness at each of the Exchange Committee meetings during the plan preparation. After
 
the plan is submitted to the Commission, the Participants, in conjunction with the Interested Parties, will discuss readiness prior
 
to the checkpoints listed in this plan. The schedule for the Participants’ meetings during plan preparation is as follows:
 
[_____ ___, 201_]
 
[_____ ___, 201_]
 
[_____ ___, 201_]
 
In addition to the Exchange Committee meetings, Participants report on their status and firm testing status at the biweekly
 
SIFMA Testing and Implementation Subcommittee meetings and the monthly SIFMA Steering Committee meetings. The schedule
 
for these meetings, prior to Phase I implementation, is as follows:
 
[_____ ___, 201_]
 
[_____ ___, 201_]
 
The equity issues (and options on those equities) that will quote in the higher amounts for Phase I that have been identified
 
and widely disseminated. The equity issues (and options on those equities) that will quote for Phase IIA will be identified by the
 
end of [_____ ___, 201_] and by the beginning of [_____ ___, 201_], respectively. These time frames meet the approximate
 
two-months’ notice that the member firms have identified to SIFMA that they need in order to inform their customers.
 
The Participants and SIFMA will ensure dissemination to their respective membership bases through the use of websites,
 
membership bulletins and the SIFMA committees.
 
Section V — Implementation phases 
A. Phase I — Limited exchange-listed issues 
The Participants recommend that the Phase-In Period consist of an initial phase, to begin on [_____ ___, 201_] and continue 
through the last day that this plan is in effect, during which a minimum of 10 to 15 exchange-listed equity issues listed on each 
of at least the NYSE and NASDAQ (and options on those equities) will quote (per the recommended quote price choice schedule 
documented earlier) and where the Participants, with the cooperation of the Interested Parties, will evaluate the industry’s 
transition. Due to the concerns of the industry and the Participants regarding the impact of the new pricing on message traffic 
and trading patterns, an evaluation of pricing by the Participants will commence beginning with this phase. 
B. Phase IIA — Additional exchange-listed issues 
Participants recommend that Phase I be followed by a partial conversion (per the recommended quote price choice schedule 
documented earlier) of approximately 50 to 100 exchange-listed equity issues (and options on those equities) beginning on 
[_____ ___, 201_] and continuing through the last day that this plan is in effect. The Participants and the Interested Parties will 
continue to evaluate the transition to the new choice of Customized Trading Spreads and its impacts on the industry, especially 
as they relate to capacity, liquidity and trading patterns. 
The trouble with small tick sizes 47 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Phase IIB — Full conversion of exchange-listed issues and/or all options checkpoint 
At Checkpoint III (determine readiness for full implementation of exchange-listed issues and/or all options), the Participants will 
evaluate the results of the first two phases of the new choice of Customized Trading Spread quoting. If, after consultation with 
the Interested Parties and the Commission, the Participants believe that the Participants and Interested Parties are technically 
prepared for full implementation, and this would not cause adverse impacts to the investing public, the Participants may elect 
to fully convert all exchange-listed issues and/or all option issues to the new choice of Customized Trading Spread quoting 
(per the recommended quote price choice schedule documented earlier). Any decision to fully convert exchange-listed issues 
and/or all options will be made during the period between [_____ ___, 201_] and [_____ ___, 201_], and a notice will be 
widely disseminated by the Participants and the SIFMA to the industry and the investing public at least 30 calendar days before 
implementation. 
D. Phase III — All markets, full implementation 
At Checkpoint IV (determine readiness for all markets, full implementation), the Participants will evaluate the results of all previous 
phases. If, after consultation with the Interested Parties and the Commission, the Participants believe that the Participants and 
the Interested Parties are technically prepared for full implementation, and this would not have an adverse impact on the investing 
public, the Participants recommend that full implementation of the new choice of Customized Trading Spreads quoting for equities 
and options (per the recommended quote price choice schedule documented earlier) begin on or before [_____ ___, 201_] 
and continue through the last day that this plan is in effect. The Participants, with the cooperation of the Interested Parties, will 
evaluate the industry’s transition to full implementation of the new choice of Customized Trading Spreads in all issues, and joint 
and/or independent studies will continue evaluating the impacts of the new choice of Customized Trading Spreads pricing. 
E. Checkpoints 
The Participants have identified five checkpoints where the Participants will formally evaluate the results of the phase-in 
implementation program and determine the industry’s ability to function without disruption to the investing public in a new choice 
of Customized Trading Spreads environment. Throughout the period during which this plan is effective, however, the Participants 
will monitor the impact of the new choice of Customized Trading Spreads on the industry and will confer with the Commission on 
those impacts. 
1. Checkpoint I — Pre-implementation evaluation 
The first checkpoint will take place on [_____ ___, 201_], when the Participants will poll the Interested Parties, review industry-
mandated test results and confer with the Commission on the industry’s preparedness to proceed with Phase I on [_____ ___, 
201_]. While the Participants have defined fallback scenarios for themselves during this phase (see Section VI — Fallback/ 
recovery) and have determined that no single firm failure will cause a fallback to fractional pricing, the Participants will be 
prepared to confer with the Commission if it appears that multiple failures are placing the investing public at risk or at a 
disadvantage. The Participants have identified the equity issues (and options on those issues) to be quoted in the new choice of 
Customized Trading Spreads in Phase 1. 
48 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Checkpoint II — Determine readiness for additional exchange-listed issues 
The second checkpoint will take place on [_____ ___, 201_], when the Participants, after polling the Interested Parties, will 
confer with the Commission on the industry’s preparedness to proceed with Phase IIA of the Phase-In Period on [_____ ___, 
201_]. While the Participants have defined fallback scenarios for themselves during this phase (see Section VI — Fallback/ 
recovery) and have determined that no single firm failure will cause a fallback to fractional pricing, the Participants will be 
prepared to confer with the Commission if it appears that multiple failures are placing the investing public at risk or at a 
disadvantage. By the end of [_____ ___, 201_], the Participants will identify the additional equity issues (and options on those 
equities) to be quoted in the new choice of Customized Trading Spreads in the second phase. 
3. Checkpoint III — Determine readiness for full implementation of exchange-listed issues and/or all options 
The third checkpoint will occur on [_____ ___, 201_]. The Participants will evaluate the results of the first two phases of the 
new choice of Customized Trading Spreads quoting. If, after consultation with the Interested Parties and the Commission, 
the Participants believe that the Participants and the Interested Parties are technically prepared for full implementation and 
this would not have an adverse impact on the investing public, the Participants may elect to fully convert all exchange-listed 
issues and/or all option issues to the new choice of Customized Trading Spreads quoting (per the recommended schedule 
documented earlier). The Participants may also elect to implement a penny pilot in selected option issues. Any decision to 
fully convert exchange-listed issues and/or all options or to implement a penny pilot on options will be made during the period 
between [_____ ___, 201_] and [_____ ___, 201_], and a notice will be widely disseminated by the Participants and the SIFMA 
to the industry and the investing public at least 30 calendar days before implementation. 
4. Checkpoint IV — Determine readiness for all markets, full implementation 
The fourth checkpoint will occur on [_____ ___, 201_], when the Participants will evaluate the results of the first three phases of 
the new choice of Customized Trading Spreads quoting. If, after consultation with the Interested Parties and the Commission, 
the Participants believe that the Participants and Interested Parties are technically prepared for full implementation and this 
would not have an adverse impact on the investing public, the Participants will proceed with full implementation of all exchange-
listed issues (if not already quoting in the new choice of Customized Trading Spreads), NASDAQ issues and all options on the 
issues (if not already quoting in the new choice of Customized Trading Spreads) on or before [_____ ___, 201_]. 
F. Post phase-in process 
The post phase-in process will begin at the end of the Phase-In Period (on or before [_____ ___, 201_]) and will last no more 
than two months. The Participants will review the Phase-In Period and the impact of the new choice of Customized Trading 
Spreads on systems capacity, liquidity and trading behavior. The Participants will submit joint and/or individual studies that 
document the impacts of the new choice of Customized Trading Spreads and may contain a recommendation on whether 
there should be a uniform minimum increment for equities or options or both. Absent Commission action on the study and 
recommendations, each Participant will submit proposed rule changes to establish its choice of minimum increments by which 
equities or options are quoted on its market no later than 30 calendar days after the filing of the study. 
The trouble with small tick sizes 49 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Section VI — Fallback/recovery 
The Participants, after consultation with the Interested Parties, have agreed that Phase I and Phase III of the Phase-In Period 
require specific procedures for Participant fallback. Throughout the period during which this plan is effective, however, the 
Participants will monitor the impact of the new choice of Customized Trading Spread-based quoting and will confer with the 
Commission on those impacts. 
For options quoting during Phase I and Phase III, there will be no intra-day fallback to fractional pricing, and issues must quote on 
every exchange in the same format, either the new choice of Customized Trading Spreads or fraction. For equity quoting during 
Phase I and Phase III, there may be an intra-day fallback to fractional pricing, as a last resort after all other efforts have been 
exhausted to remediate the problem. Specific details of the fallback plan will be published prior to the [_____ ___, 201_] start 
date. For equity issues, in the event that a regional exchange Participant experiences a problem on day one of Phase I or Phase 
III that would require a fallback to fractional quoting, the Participant must attempt to fix the problem and may halt trading if the 
primary exchange for affected issues continues to quote in the new choice of Customized Trading Spreads. A problem at one of 
the Participants on day one of Phase I or Phase III will not necessitate a trading halt or fallback to fractional quoting by the other 
Participants. However, if any of the primary exchanges revert back to fractional quoting on day two, all other equity Participants 
quoting the issues on the affected primary exchange will also revert back to fractional quoting for those issues. Any issues 
falling back to fractions must continue to quote in fractions until the Monday following the correction of the problem. 
For option issues, a problem with one of the Participants during Phase I or Phase III will not necessitate a trading halt by the 
other Participants. If an options exchange on the following day must fallback to fractional quoting and multiple-listed issues are 
involved in the fallback, all options exchanges will fallback. If the underlying equity reverts back to quoting in fractions, options 
on that equity may continue to quote in the new choice of Customized Trading Spreads. If a Participant chooses to revert the 
options back to fractional quoting until such time as the underlying equity issues are ready to convert to the new choice of 
Customized Trading Spread quoting, the conversion must occur overnight, and for multiple-listed issues, all options exchanges 
quoting the issues must agree to fallback as well. Any option issues falling back to fractions must continue to quote in fractions 
until the Monday following the correction of the problem. 
Any programmatic problems encountered by the Participants after day one of Phase I or Phase III and any capacity issues will 
be treated like any other production problem by each Participant and will be subject to their normal operating procedures. As 
noted above, however, the Participants will monitor the impact of the new choice of Customized Trading Spreads-based quoting 
on the industry throughout the time that this plan is effective and will confer with the Commission on the impacts. If a clearing 
or settlement entity cannot process the first day’s trading activity, the Participants trading the issues cleared or settled by the 
entity will open for the new choice of Customized Trading Spreads on the following business day. If the clearing or settlement 
entity still cannot process trading activity, the Participants may halt trading in the issues until the entity can successfully process 
the first day’s trades. 
Each Participant will submit its own procedures on how to deal with open orders on issues quoting in the new choice of 
Customized Trading Spread format that will revert back to fractional pricing. 
50 The trouble with small tick sizes 

   
 
 
 
 
 
 
 
 
 
 
Section VII — Summary 
The Participants with the cooperation of the Interested Parties have agreed upon an approach to implement a phased-in 
implementation program for the new choice of Customized Trading Spread quoting that provides the maximum safety for the 
industry and the investing public, while satisfying the Commission order on the new choice of Customized Trading Spread 
implementation. 
The implementation of a limited number of equities (and options on those equities) quoting at pre-described price choices in the 
first phase tests the operational readiness of the industry and at the same time minimizes the ill effects to the investing public of 
a fallback to fractional quoting. 
Following Phase I is an additional limited phase of new choice of Customized Trading Spreads quoting of equities and options at 
pre-described phased checkpoints. The goals of Phase IIA are to evaluate projected capacity estimates, impacts to liquidity and 
new trading patterns in advance of full implementation of the new choice of Customized Trading Spreads pricing. 
The trouble with small tick sizes 51 

  
 
 
 
Appendix C
 
Tick size standards around the world 
Tick sizes vary globally, but mostly as a function of share price. This near-universal method of tick size variation (oscillating 
tick sizes according to share price) fails to account for a company’s market float, liquidity and trading volume, among other 
characteristics. Effective tick size regimens should optimally be customized to these characteristics of each public company; 
computer technology is now at the point where mass customization of tick sizes could be cost-effectively achieved. 
Market Currency Stock price per share Tick size Relative tick size
1 
Australia AUD < 0.10 0.001 ≥ 0.1% 
0.10 to 0.50 0.005 5% to 1% 
> 0.50 0.01 ≤ 2% 
Austria EUR All shares 0.01 
Austria – ATX stocks EUR < 10.00 0.001 ≥ 0.01% 
10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
≥ 100.00 0.05 ≤ 0.05% 
Bahrain BHD All shares trading in BHD 0.001 
USD0.01 to USD0.50 USD0.005 50% to 1% 
> USD0.51 USD0.01 ≤ 2% 
Belgium EUR < 10.00 0.001 ≥ 0.01% 
10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
≥ 100.00 0.05 ≤ 0.05% 
Certain stocks > 10.00 0.005 ≤ 0.05% 
Brazil BRL All shares 0.01 
Bulgaria BGN All shares 0.001 
Canada CAD < 0.50 0.005 ≥ 1% 
≥ 0.50 0.01 ≤ 2% 
Cyprus EUR < 3.00 0.01 ≥ 0.33% 
3.00 to 59.98 0.02 0.67% to 0.03% 
≥ 60.00 0.05 ≤ 0.08% 
Czech Republic CZK < 200.00 0.01 ≥ 0.01% 
200.00 to 999.9 0.1 0.05% to 0.01% 
≥ 1,000.00 1 ≤ 0.1% 
1 
Tick size as a percentage of price per share. 
52 The trouble with small tick sizes 

   
Market Currency Stock price per share Tick size Relative tick size
1 
Denmark – OMX C20 stocks DKK < 0.50 0.0001 ≥ 0.02% 
0.50 to 0.9995 0.0005 0.1% to 0.05% 
1.00 to 4.999 0.001 0.1% to 0.02% 
5.00 to 9.995 0.005 0.1% to 0.05% 
10.00 to 49.99 0.01 0.1% to 0.02% 
50.00 to 99.95 0.05 0.1% to 0.05% 
100.00 to 499.90 0.1 0.1% to 0.02% 
500.00 to 999.50 0.5 0.1% to 0.05% 
1,000.00 to 4,999.00 1 0.1% to 0.02% 
5,000.00 to 9,995.00 5 0.1% to 0.05% 
10,000.00 to 49,990.00 10 0.1% to 0.02% 
≥ 50,000.00 50 ≤ 0.1% 
Egypt EGP All shares 0.01 
Finland EUR All shares 0.01 
Finland – OMXH25 stocks DKK < 0.50 0.0001 ≥ 0.02% 
0.50 to 0.9995 0.0005 0.1% to 0.05% 
1.00 to 4.999 0.001 0.1% to 0.02% 
5.00 to 9.995 0.005 0.1% to 0.05% 
10.00 to 49.99 0.01 0.1% to 0.02% 
50.00 to 99.95 0.05 0.1% to 0.05% 
100.00 to 499.90 0.1 0.1% to 0.02% 
500.00 to 999.50 0.5 0.1% to 0.05% 
1,000.00 to 4,999.00 1 0.1% to 0.02% 
5,000.00 to 9,995.00 5 0.1% to 0.05% 
10,000.00 to 49,990.00 10 0.1% to 0.02% 
≥ 50,000.00 50 ≤ 0.1% 
France EUR < 10.00 0.001 ≥ 0.01% 
10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
≥ 100.00 0.05 ≤ 0.05% 
Certain stocks > 10.00 0.005 ≤ 0.05% 
Germany EUR < 10.00 0.001 ≥ 0.01% 
10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
≥ 100.00 0.05 ≤ 0.05% 
Greece EUR < 1.00 0.001 ≥ 0.1% 
1.00 to 2.99 0.01 1% to 0.33% 
3.00 to 59.98 0.02 0.67% to 0.03% 
≥ 60.00 0.05 ≤ 0.08% 
Hong Kong HKD ≤ 0.25 0.001 ≥ 0.4% 
0.255 to 0.50 0.005 1.96% to 1% 
0.51 to 10.00 0.01 1.96% to 0.1% 
10.02 to 20.00 0.02 0.2% to 0.1% 
20.05 to 100.00 0.05 0.25% to 0.05% 
100.10 to 200.00 0.1 0.1% to 0.05% 
200.20 to 500.00 0.2 0.1% to 0.04% 
500.50 to 1,000.00 0.5 0.1% to 0.05% 
1 
Tick size as a percentage of price per share. 
The trouble with small tick sizes 53 

  
 
 
Market Currency Stock price per share Tick size Relative tick size
1 
Hong Kong HKD 1,001.00 to 2,000.00 1 0.1% to 0.05% 
(continued) 2,002.00 to 5,000.00 2 0.1% to 0.04% 
5,005.00 to 9,995.00 5 0.1% to 0.05% 
Hungary HUF Certain shares 1 
Certain shares 5 
Hungary – BUX stocks HUF All shares 1 
India INR All shares 0.05 
Indonesia IDR < 200.00 1 ≥ 0.5% 
200.00 to 495.00 5 2.5% to 1% 
500.00 to 1990.00 10 2% to 0.5% 
2,000.00 to 4,975.00 25 1.25% to 0.5% 
≥ 5,000.00 50 ≤ 1% 
Ireland EUR All shares 0.001 
Ireland – ISEQ 20 stocks EUR < 10.00 0.001 ≥ 0.01% 
10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
≥ 100.00 0.05 ≤ 0.05% 
Israel ILS All shares 0.01 
Italy EUR < 0.25 0.0001 ≥ 0.04% 
0.25 to 0.9995 0.0005 0.2% to 0.05% 
1.00 to 1.999 0.001 0.1% to 0.05% 
2.00 to 4.9975 0.0025 0.125% to 0.05% 
5.00 to 9.995 0.005 0.1% to 0.05% 
≥ 10.00 0.01 ≤ 0.1% 
Japan JPY < 2,000.00 1 ≥ 0.05% 
2,000.00 to 2,295.00 5 0.25% to 0.22% 
3,000.00 to 29,990.00 10 0.33% to 0.03% 
30,000.00 to 49,950.00 50 0.17% to 0.1% 
50,000.00 to 99,900.00 100 0.2% to 0.1% 
100,000.00 to 999,000.00 1,000 1% to 0.1% 
1,000,000.00 to 10,000 1% to 0.05% 
19,990,000.00 
20,000,000.00 to 50,000 0.25% to 0.17% 
29,950,000.00 
≥ 30,000,000.00 100,000 ≤0.33% 
Mexico MXN < 1,000,000,000.00 0.01 ≥ 1 × 10
-11 
Netherlands EUR < 10.00 0.001 ≥ 0.01% 
10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
≥ 100.00 0.05 ≤ 0.05% 
Certain stocks > 10.00 0.005 ≤ 0.05% 
New Zealand NZD < 0.20 0.001 ≥ 0.5% 
≥ 0.20 0.01 ≤ 5% 
1 
Tick size as a percentage of price per share. 
54 The trouble with small tick sizes 

   
Market Currency Stock price per share Tick size Relative tick size
1 
Norway NOK < 0.50 0.0001 ≥ 0.02% 
0.50 to 0.9995 0.0005 0.1% to 0.05% 
1.00 to 4.999 0.001 0.1% to 0.02% 
5.00 to 9.995 0.005 0.1% to 0.05% 
10.00 to 49.99 0.01 0.1% to 0.02% 
50.00 to 99.95 0.05 0.1% to 0.05% 
100.00 to 499.90 0.1 0.1% to 0.02% 
500.00 to 999.50 0.5 0.1% to 0.05% 
1,000.00 to 4,999.00 1 0.1% to 0.02% 
5,000.00 to 9,995.00 5 0.1% to 0.05% 
10,000.00 to 49,990.00 10 0.1% to 0.02% 
≥ 50,000.00 50 ≤ 0.1% 
Poland PLN < 50.00 0.01 ≥ 0.02% 
50.00 to 99.95 0.05 0.1% to 0.05% 
100.00 to 499.90 0.1 0.1% to 0.02% 
≥ 500.00 0.5 ≤ 0.1% 
Portugal EUR < 10.00 0.001 ≥ 0.01% 
10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
≥ 100.00 0.05 ≤ 0.05% 
Certain stocks > 10.00 0.005 ≤ 0.05% 
Qatar QAR All shares 0.01 
Romania RON < 0.10 0.0001 ≥ 0.1% 
0.10 to 0.499 0.001 1% to 0.2% 
0.50 to 0.995 0.005 1% to 0.5% 
1.00 to 4.99 0.01 1% to 0.2% 
5.00 to 9.95 0.05 1% to 0.5% 
≥ 10.00 0.1 ≤ 1% 
Saudi Arabia SAR ≤ 25.00 0.05 ≥ 0.2% 
25.10 to 50.00 0.1 0.4% to 0.2% 
≥ 50.25 0.25 ≤ 0.5% 
Singapore SGD < 1.00 0.005 ≥ 0.5% 
1.00 to 2.99 0.01 1% to 0.33% 
3.00 to 4.98 0.02 0.67% to 0.4% 
5.00 to 9.95 0.05 1% to 0.5% 
≥ 10.00 0.1 ≤ 1% 
Spain EUR ≤ 50.00 0.01 ≥ 0.02% 
> 50.00 0.05 ≤ 0.1% 
Certain stocks 0.005 
Spain – IBEX35 and EUR < 10.00 
0.001 ≥ 0.01% 
IBEX medium stocks 10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
≥ 100.00 0.05 ≤ 0.05% 
Sweden SEK < 0.50 0.0001 ≥ 0.02% 
0.50 to 0.9995 0.0005 0.1% to 0.05% 
1.00 to 4.999 0.001 0.1% to 0.02% 
1 
Tick size as a percentage of price per share. 
The trouble with small tick sizes 55 

  
Market Currency Stock price per share Tick size Relative tick size
1 
Sweden SEK 5.00 to 9.995 0.005 0.1% to 0.05% 
(continued) 10.00 to 49.99 0.01 0.1% to 0.02% 
50.00 to 99.95 0.05 0.1% to 0.05% 
100.00 to 499.90 0.1 0.1% to 0.02% 
500.00 to 999.50 0.5 0.1% to 0.05% 
1,000.00 to 4,999.00 1 0.1% to 0.02% 
5,000.00 to 9,995.00 5 0.1% to 0.05% 
10,000.00 to 49,990.00 10 0.1% to 0.02% 
≥ 50,000.00 50 ≤ 0.1% 
Switzerland – Blue chip stocks CHF < 0.50 0.0001 ≥ 0.02% 
0.50 to 0.9995 0.0005 0.1% to 0.05% 
1.00 to 4.999 0.001 0.1% to 0.02% 
5.00 to 9.995 0.005 0.1% to 0.05% 
10.00 to 49.99 0.01 0.1% to 0.02% 
50.00 to 99.95 0.05 0.1% to 0.05% 
100.00 to 499.9 0.1 0.1% to 0.02% 
500.00 to 999.50 0.5 0.1% to 0.05% 
1,000.00 to 4,999.00 1 0.1% to 0.02% 
5,000.00 to 9,995.00 5 0.1% to 0.05% 
≥ 10,000.00 10 ≤ 0.1% 
Switzerland – Non-blue chip stocks CHF < 10.00 0.01 ≥ 0.1% 
10.00 to 99.95 0.05 0.5% to 0.05% 
100.00 to 249.90 0.1 0.1% to 0.04% 
250.00 to 499.75 0.25 0.1% to 0.05% 
500.00 to 999.50 0.5 0.1% to 0.05% 
1,000.00 to 4,999.00 1 0.1% to 0.02% 
≥ 5,000.00 5 ≤ 0.1% 
Switzerland – SMI expanded stocks CHF < 0.50 0.0001 ≥ 0.02% 
0.50 to 0.9995 0.0005 0.1% to 0.05% 
1.00 to 4.999 0.001 0.1% to 0.02% 
5.00 to 9.995 0.005 0.1% to 0.05% 
10.00 to 49.99 0.01 0.1% to 0.02% 
50.00 to 99.95 0.05 0.1% to 0.05% 
100.00 to 499.9 0.1 0.1% to 0.02% 
500.00 to 999.50 0.5 0.1% to 0.05% 
1,000.00 to 4,999.00 1 0.1% to 0.02% 
5,000.00 to 9,995.00 5 0.1% to 0.05% 
10,000.00 to 49,990.00 10 0.1% to 0.02% 
≥ 50,000.00 50 ≤ 0.1% 
Turkey TRY ≤ 5.00 0.01 ≥ 0.2% 
5.02 to 10.00 0.02 0.4% to 0.2% 
10.05 to 25.00 0.05 0.5% to 0.2% 
25.10 to 50.00 0.1 0.4% to 0.2% 
50.25 to 100.00 0.25 0.5% to 0.25% 
1 
Tick size as a percentage of price per share. 
56 The trouble with small tick sizes 

   
Market Currency Stock price per share Tick size Relative tick size
1 
UAE (Abu Dhabi) AED ≤ 10.00 0.01 ≥ 0.1% 
10.01 to 100.00 0.05 0.5% to 0.05% 
≥ 100.01 0.1 ≤ 0.1% 
UAE (Dubai) AED ≤ 0.99 0.001 ≥ 0.1% 
1.00 to 9.99 0.01 1% to 0.1% 
10.00 to 99.95 0.05 0.5% to 0.05% 
≥ 100 0.1 ≤ 0.1% 
United Kingdom – AIM stocks GBP < 10.00 0.0001 ≥ 0.001% 
(GBP/USD/EUR) 10.00 to 99.99 0.01 0.1% to 0.01% 
≥ 100.00 0.25 ≤ 0.25% 
United Kingdom – AIM stocks GBX < 10.00 0.0001 ≥ 0.001% 
(GBX) ≥ 10.00 0.25 ≤ 2.5% 
United Kingdom – FTSE 100 stocks GBP < 1.00 0.0001 ≥ 0.01% 
1.00 to 4.9995 0.0005 0.05% to 0.01% 
5.00 to 9.999 0.001 0.02% to 0.01% 
10.00 to 49.995 0.005 0.05% to 0.01% 
50.00 to 99.99 0.01 0.02% to 0.01% 
100.00 to 499.95 0.05 0.05% to 0.01% 
500.00 to 999.90 0.1 0.02% to 0.01% 
1,000.00 to 4,999.50 0.5 0.05% to 0.01% 
5,000.00 to 9,999.00 1 0.02% to 0.01% 
≥ 10,000.00 5 ≤ 0.05% 
United Kingdom – FTSE 250 stocks GBP < 0.50 0.0001 ≥ 0.02% 
0.50 to 0.9995 0.0005 0.1% to 0.05% 
1.00 to 4.999 0.001 0.1% to 0.02% 
5.00 to 9.995 0.005 0.1% to 0.05% 
10.00 to 49.99 0.01 0.1% to 0.02% 
50.00 to 99.95 0.05 0.1% to 0.05% 
100.00 to 499.90 0.1 0.1% to 0.02% 
500.00 to 999.50 0.5 0.1% to 0.05% 
1,000.00 to 4,999.00 1 0.1% to 0.02% 
5,000.00 to 9,995.00 5 0.1% to 0.05% 
10,000.00 to 49,990.00 10 0.1% to 0.02% 
≥ 50,000.00 50 ≤ 0.1% 
United States USD < 1.00 0.0001 ≥ 0.01% 
≥ 1.00 0.01 ≤ 1% 
1 
Tick size as a percentage of price per share. 
The trouble with small tick sizes 57 

  
Appendix D
 
Tick size changes on the NASDAQ, NYSE and AMEX 
For all three charts below: 
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic. 
Includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs. 
Tick size changes on the NASDAQ Stock Market overlaid on the drop in the number of small IPOs 
100% 
80% 
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 
Quote-driven market (pre-Reg. ATS) 
Effective tick size > minimum tick size 
Electronic-order-book market (post-Reg. ATS) 
Effective tick size collapsed to minimum tick size 
A Order Handling Rules 
B Regulation ATS 
C Decimalization 
D Sarbanes-Oxley Act 
E Regulation NMS 
Transactions 
raising less than 
$50 million 
$0.30 
Transactions 
raising at least
90% 
$50 million 
$0.25 
70% 
Percentage of total U.S. IPOs 
$0.20 
60% 
50% 
40% 
NASDAQ tick sizes
$0.15 
$0.10 
30% 
20% 
$0.05 
10% 
0% 
$0.00 
ABCD E 
Bankable 
spread or 
effective tick 
size 
Tick size for 
stocks ≥ $10
1 
Tick size for 
stocks < $10
2 
1
1991: $0.125 for NASDAQ stocks ≥ $10; 1997: $0.0625 for NASDAQ stocks ≥ $10. 
2
1991: $0.03125 for NASDAQ stocks < $10. 
58 The trouble with small tick sizes 

   
Tick size changes on the New York Stock Exchange overlaid on the drop in the number of small IPOs 
100% 
Transactions 
raising at least
90% 
$50 million 
80% 
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 
Quote-driven market (pre-Reg. ATS) 
Effective tick size > minimum tick size 
Electronic-order-book market (post-Reg. ATS) 
Effective tick size collapsed to minimum tick size 
$0.30 
$0.25 
$0.20 
$0.15 
$0.10 
$0.05 
$0.00 
NYSE tick sizes 
A Order Handling Rules 
B Regulation ATS 
C Decimalization 
D Sarbanes-Oxley Act 
E Regulation NMS 
Transactions 
raising less than 
$50 million 
70% 
60% 
50% 
40%
Percentage of total U.S. IPOs 
Bankable 
spread or 
effective tick 
size 
Tick size for 
higher-priced 
stocks
1 
20% 
30% 
Tick size for 
mid-priced 
stocks
2 
10% 
Tick size for 
lower-priced 
0% 
stocks
3 
ABCD E 
1
1991: $0.125 for NYSE stocks > $1; 1997: $0.0625 for NYSE stocks ≥ $0.50.
 
2
1991: $0.0625 for NYSE stocks > $0.50 and < $1.
 
3
1991: $0.03125 for NYSE stocks < $0.50.
 
Tick size changes on the American Stock Exchange overlaid on the drop in the number of small IPOs 
100% 
80% 
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 
Quote-driven market (pre-Reg. ATS) 
Effective tick size > minimum tick size 
Electronic-order-book market (post-Reg. ATS) 
Effective tick size collapsed to minimum tick size 
A Order Handling Rules 
B Regulation ATS 
C Decimalization 
D Sarbanes-Oxley Act 
E Regulation NMS 
Transactions 
raising less than 
$50 million 
$0.30 
Transactions 
raising at least
90% 
$50 million 
$0.25 
70% 
Percentage of total U.S. IPOs 
$0.20 
60% 
50% 
40% 
AMEX tick sizes
$0.15 
Bankable 
spread or 
effective tick 
size 
$0.10 
Tick size for 
higher-priced 
stocks
1 
20% 
30% 
Tick size for 
$0.05 
mid-priced 
stocks
2 
10% 
Tick size for 
lower-priced 
0% 
$0.00 
stocks
3 
ABCD E 
1
1991: $0.125 for AMEX stocks ≥ $1 (raised to ≥ $5 in 1992, raised again to ≥ $10 in 1995); 1997: $0.0625 for AMEX stocks ≥ $0.25.
 
2
1991: $0.0625 for AMEX stocks ≥ $0.25 and < $1 (raised to < $5 in 1992).
 
3
1991: $0.03125 for AMEX stocks < $0.25.
 
The trouble with small tick sizes 59 

  
 
 
 
 
 
 
 
 
 
  
Appendix E
 
IPO economics 
Today’s investment banks lose money supporting small IPOs in the aftermarket and, as a result, provide very little “real” support 
Small IPOs used to be very lucrative transactions for banks 
Pre-decimalization: Banks could make an additional 2x their IPO fees 
through aftermarket commissions and trading
1 bookrunner + 1 co-manager, 60/40 economics 
Bookrunner’s aftermarket revenue $1,680,000
Gross proceeds (GP) $25,000,000 
Co-manager’s aftermarket revenue $1,120,000
Gross spread (GS, 7%) $1,750,000 
Bookrunner's net IPO-related revenue $2,520,000
Total management fee (MF, 20% of GS) $350,000 
Co-managers's net IPO-related revenue $1,680,000
Total selling concessions (SC, 60% of GS) $1,050,000 
Bookrunner’s IPO fee (MF + SC) $840,000 
Post-decimalization: Banks lose money in the aftermarket on small
Co-manager’s IPO fee (MF + SC) $560,000 
IPOs, giving back at least 10% of their IPO fees, resulting in a 70% 
decline in revenue 
Bookrunner’s aftermarket loss $(84,000) 
Co-manager’s aftermarket loss $(56,000) 
Bookrunner's net IPO-related revenue $756,000 
Co-managers's net IPO-related revenue $504,000 
Given the crowded covers and 
Net IPO-related revenue 
2 bookrunners + 3 co-managers, 40/30/15/10/5 economics 
Gross proceeds (GP) $25,000,000 
expected aftermarket losses, 
small IPOs are not nearly as 
lucrative as they used to be 
Bookrunner A 
Bookrunner B 
$504,000 
$378,000 
Gross spread (GS, 7%) $1,750,000 
Co-manager C $189,000 
Total management fee (MF, 20% of GS) $350,000 
Co-manager D $126,000 
Total selling concessions (SC, 60% of GS) $1,050,000 
Co-manager E $63,000 
Bookrunner A’s IPO fee (MF+SC) $560,000 
Bookrunner B’s IPO fee (MF+SC) $420,000 
Deal sizes must be 5x–7x 
Proceeds required to duplicate 
Co-manager C’s IPO fee (MF+SC) $210,000 
larger in order for bookrunners 
pre-decimalization revenue 
Co-manager D’s IPO fee (MF+SC) 
Co-manager E’s IPO fee (MF + SC) 
$140,000 
$70,000 
to generate the same level 
of revenue as they did pre-
decimalization 
Bookrunner A 
Bookrunner B 
$125,000,000 
$166,666,667 
Today’s small IPOs look very different 
Source: Capital Markets Advisory Partners LLC. 
60 The trouble with small tick sizes 

   
 
 
 
Appendix F
 
IPO success rates 
There is a secular decline in IPO success rates that is independent of the Sarbanes-Oxley Act. Companies going public today are 
failing at increasingly higher rates as more deals are being withdrawn, priced below their initial filing range and trading below their 
offer price. This decline in IPO success rates has been exacerbated by the steady degradation in equity sales coverage of institutional 
and retail investors that is a reaction to the erosion in bankable spreads and commissions. 
Success rate of all IPOs 
50% 
100% 
70% 
60% 
80% 
90% 
40% 
20% 
30% 
10% 
0% 
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 
Source: Capital Markets Advisory Partners LLC.
 
Includes only corporate issuers, excluding funds, MLPs, SPACs and REITs.
 
Based on the average success rate of the last 30 filed deals, up to one year ago. A successful deal is defined as: 1) priced within one year of filing, 2) priced at or above the low end of the 

filing range, and 3) trading at or above issue price one month after pricing.
 
The trouble with small tick sizes 61 

  
Success rate of IPOs with proceeds greater than $500 million 
50% 
100% 
70% 
60% 
80% 
90% 
40% 
20% 
30% 
10% 
0% 
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
 
Source: Capital Markets Advisory Partners LLC.
 
Includes only corporate issuers, excluding funds, MLPs, SPACs and REITs.
 
Based on the average success rate of the last 30 filed deals, up to one year ago.  A successful deal is defined as: 1) priced within one year of filing, 2) priced at or above the low end 

of the filing range, and 3) trading at or above issue price one month after pricing.
 
62 The trouble with small tick sizes 

   
Success rate of IPOs maintaining issue price one month after going public 
50% 
100% 
70% 
60% 
80% 
90% 
40% 
20% 
30% 
10% 
0% 
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
 
Source: Capital Markets Advisory Partners LLC.
 
Includes only corporate issuers, excluding funds, MLPs, SPACs and REITs.
 
Based on the average success rate of the last 30 filed deals, up to one month ago.  A successful deal is defined as trading at or above issue price one month after pricing.
 
The trouble with small tick sizes 63
 

  
		 	 		   		  	 	  		 	
	  	  	   	    	    			  	 		
	
	  	  	   	  	  	
		  	  	   	   	  	
	    	 		
	   	 	  	  	 	 	   	 	 	  		    	    	  	 	  	
	 	   	
 
		 	 	  	   	  	    	    	
 
		  	   	   		 	  	  	  	    		
		   	    	
References
 
Hee-Joon Ahn, Jun Cai and Yan Leung Cheung, “Price clustering on the limit-order book: Evidence from the stock exchange of
 
Hong Kong” (2005)
 
Michael Aitken and Carole Comerton-Forde, “Do reductions in tick sizes influence liquidity?” (2005)
 
David E. Allen and Josephine Sudiman, “
Does tick size change improve liquidity provision? Evidence from the Indonesia
 
stock exchange” (2009)
 
James J. Angel, “Tick size, share prices, and stock splits” (1997)
 
Hendrik Bessembinder, “Trade execution costs and market quality after decimalization” (2003)
 
Ekkehart Boehmer, Kingsley Fong and Julie Wu, “International evidence on algorithmic trading” (2012)
 
David Bourghelle and Fany Declerck, “Why markets should not necessarily reduce the tick size” (2002)
 
Bidisha Chakrabarty and Kee H. Chung, “Can sub-penny pricing reduce trading costs?” (2008)
 
Sugato Chakravarty, Stephen P. Harris and Robert A. Wood, “Decimal trading and market impact” (2001)
 
K. C. Chan and Chuan-Yang Hwang, “
The impact of tick size on the quality of a pure order-driven market: evidence from the stock
 
exchange of Hong Kong” (2001)
 
Kee H. Chung, Chairat Chuwonganant and D. Timothy McCormick, “Order preferencing and market quality on NASDAQ before
 
and after decimalization” (2003)
 
Kee H. Chung, Kenneth A. Kim and Pattanaporn Kitsabunnarat, “Liquidity and quote clustering in a market with multiple tick sizes” 

(2005)
 
David Easley, Marcos M. López de Prado and Maureen O’Hara, “
The microstructure of the ‘flash crash’: Flow toxicity, liquidity
 
crashes and the probability of informed trading” (2010)
 
Jared Egginton, Bonnie F. Van Ness and Robert A. Van Ness, “Quote stuffing” (2012)
 
Federation of European Securities Exchanges, www.fese.be/en/?inc=cat&id=34, “Tick size regimes” (2012)
 
Financial Times, “LSE bows to tick size pressure as war erupts” (2009)
 
Michael A. Goldstein and Kenneth A. Kavajecz, “
Eighths, sixteenths and market depth: Changes in tick size and liquidity provision
 
on the NYSE” (1998)
 
Terrence Hendershott, Charles M. Jones and Albert J. Menkveld, “Does algorithmic trading improve liquidity?” (2011)
 
64 The trouble with small tick sizes 

   
	  	   	   	  	   	
 
	   	 	  	 	
 
	   	 		   	 		  		  		
	   	    	 	    	  		  	 		  	
		  	  	   	  	 	   	 
	   	 		   	   	 		   	   	  	  	
	    	  		  	  	
Roger D. Huang and Hans R. Stoll, “Tick size, bid-ask spreads and market structure” (2001)
 
Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues, “Recommendations regarding regulatory responses to the
 
market events of May 6, 2010” (2011)
 
Soohun Kim and Dermot Murphy, “The impact of high-frequency trading on stock market liquidity measures” (2011)
 
Andrei Kirilenko, Albert S. Kyle, Mehrdad Samadi and Tugkan Tuzun, “The flash crash: The impact of high-frequency trading on an
 
electronic market” (2011)
 
Oliver Linton and Maureen O’Hara, “
The impact of computer trading on liquidity, price efficiency/discovery and transaction costs” (2011)
 
Daan Struyven, “The Battle between the Bombay Stock Exchange and the National Stock Exchange” (2008)
 
The Trade News, “NYSE Euronext tick size move ‘bad’ for market structure” (2011)
 
U.S. Securities and Exchange Commission, “The SEC report to Congress on decimalization” (2012)
 
Vincent Van Kervel, “Liquidity: What you see is what you get?” (2012)
 
Ingrid M. Werner, “
Execution quality for institutional orders routed to NASDAQ dealers before and after decimals” (2003)
 
X. Frank Zhang, “High-frequency trading, stock volatility and price discovery” (2010) 
The trouble with small tick sizes 65 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
About the authors
 
David Weild 
David Weild oversees Capital Markets at Grant Thornton LLP, providing strategies 
and insight into today’s global capital markets. Weild is also the chairman and CEO 
of Capital Markets Advisory Partners, a firm that specializes in providing equity 
capital markets advice to issuers. He is a co-author of Market structure is causing 
the IPO crisis — and more and A wake-up call for America, and is a frequent 
resource to the financial news media on issues relevant to the capital markets. 
Weild is the former vice chairman and executive committee member of The 
NASDAQ Stock Market, with line responsibility for the global listings businesses. 
Prior to NASDAQ, he spent 14 years in a variety of senior investment banking and 
equity capital markets roles at Prudential Securities. He oversaw more than 1,000 
initial public offerings, follow-on offerings and convertible transactions, and was an 
innovator in new issue systems and transaction structures. 
Weild earned an MBA from the Stern School of Business and a BA from Wesleyan 
University. He studied on exchange at The Sorbonne, École des Haute Études 
Commerciales and the Stockholm School of Economics. He holds FINRA Series 7, 
24, 63, 79 and 99 licenses. 
Contact information 
Grant Thornton LLP, Capital Markets 
T 212.542.9979 
E [email protected] 
Edward Kim 
Edward Kim is a capital markets senior adviser at Grant Thornton LLP, providing 
strategies and insight into today’s global capital markets, and is co-founder and 
managing director at Capital Markets Advisory Partners, the firm that specializes 
in providing equity capital markets advice to issuers. He is a co-author of Market 
structure is causing the IPO crisis — and more and A wake-up call for America, 
and often provides the financial news media with commentary and analysis on 
capital markets trends. 
Kim is the former head of product development at The NASDAQ Stock Market. 
Prior to NASDAQ, he worked in equity research at Robertson Stephens, equity 
trading at Lehman Brothers, and investment banking and equity syndicate at 
Prudential Securities. 
Kim earned a BS in materials science and engineering from the Massachusetts 
Institute of Technology and holds FINRA Series 7, 79 and 99 licenses. 
Contact information 
Grant Thornton LLP, Capital Markets 
T 702.823.1259 
E [email protected] 
Lisa Newport 
Lisa Newport is a capital markets director at Grant Thornton LLP, providing 
strategies and insights into today’s global capital markets. She specializes in 
financial analysis and leads the group’s quantitative and qualitative research. 
Prior to joining Grant Thornton, Newport spent more than five years with the Board 
of Governors of the Federal Reserve System, focusing on U.S. policy initiatives 
and operational risk management. She also spent more than seven years at The 
NASDAQ Stock Market, specializing in financial industry research. 
Newport earned an MBA from the Massachusetts Institute of Technology and a BA 
in mathematics from Mills College. 
Contact information 
Grant Thornton LLP, Capital Markets 
T 202.861.4114 
E [email protected] 
66 The trouble with small tick sizes 



 
 
 
 
 
 
 
 
 
 
 
 
Content in this publication is not intended to answer specific 
questions or suggest suitability of action in a particular case. 
For additional information on the issues discussed, consult 
a Grant Thornton LLP client service partner. 
The people in the independent firms of Grant Thornton 
International Ltd provide personalized attention and the highest 
quality service to public and private clients in more than 100 
countries. Grant Thornton LLP is the U.S. member firm of 
Grant Thornton International Ltd, one of the six global audit, tax 
and advisory organizations. Grant Thornton International Ltd 
and its member firms are not a worldwide partnership, as each 
member firm is a separate and distinct legal entity. 
In the U.S., visit Grant Thornton LLP at www.GrantThornton.com. 
© Grant Thornton LLP
 
This document may be used in whole or part with attribution.
 
U.S. member firm of Grant Thornton International Ltd 

SEC Roundtable on 
Decimalization 
Submission by David Weild, Senior Advisor — Grant Thornton LLP 

This submission refers to File Number 4-657 and is being sent to 
[email protected]. It responds to all questions posed to all panels 
for the Roundtable on Decimalization that will be held on February 5, 2013 
at the Securities & Exchange Commission in Washington, D.C. 

mailto:[email protected]


 

 

  
 

 

  

 

  

 1 SEC Roundtable on Decimalization | Feb. 5, 2013

Panel 1 — Evaluating Concerns Relating to 
Tick Size for Small and Middle Capitalization 
Companies 

Given the current market structure, does a one-cent minimum tick size inhibit IPOs or 
otherwise have any negative effects on small and middle capitalization companies? 
	 Yes. One-cent tick sizes (and the associated loss of economic incentives to support small cap 

companies) inhibit IPOs by compromising the breadth of institutional and retail equity distribution 
required to market and sustain visibility and liquidity in small cap stocks in the aftermarket. If stocks 
are not supported in the aftermarket (once they go public), then stock prices fall and IPO windows 
close. One-cent minimum tick sizes are part of a broader family of problems that have removed 
economic incentives from the value providers (sell-side firms that provided equity research, sales and 
capital commitment) as opposed to the execution-only firms. Similarly, economic incentives were lost 
for the value providers through the shrinkage in retail brokerage commissions due to the rise of self-
directed brokerage (although it is not clear that consumers benefited from the shrinkage in brokerage 
commissions since 1) transaction costs may have simply shifted to models that charge based on assets 
under management, 2) while economic growth has declined creating a long-term drag on investor 
returns, and 3) institutional liquidity in small cap stocks has declined). 

Are there other economic or regulatory developments during the timeframe that 
decimalization has been in place that may have had a more significant impact on 
U.S. IPOs?  
	 The shift from a quote-based market to an electronic order-based market (due to Regulation ATS in 

1998) destroyed the economic incentive from as much as 25 cents per share to the minimum tick size 
of 3.125 cents. It is not coincidental that the small (sub-$50 million) IPO immediately declined as a 
percent of total IPOs and has never recovered. See Figure 1.  

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 2 SEC Roundtable on Decimalization | Feb. 5, 2013

Figure 1: Small IPOs (< $50 million) today represent less than 20% of all IPOs. 

	 “Decimalization” is in one instance the shift in 2001to one-cent trading increments. However, 
popularly it is used to refer to the loss of economic incentives to market and attract investors to 
otherwise illiquid and unknown stocks which make up the vast majority of public companies. So, in 
the aggregate, the loss of economic incentives was driven primarily by the tripartite changes of the 
Order Handling Rules (1997), Regulation ATS (1998) and the dawn of low-tick-size electronic 
markets, and culminated with Decimalization (2001). The loss of economics to the value providers 
was in turn exacerbated by permitted kickback practices (e.g., payment for order flow, rebates and 
execution within the minimum allowable tick size) and the disintermediation that ensued when the 
self-directed low-cost brokerage models (e.g. E*Trade, Schwab, Ameritrade, TD Waterhouse, Datek, 
Fidelity Brokerage) emerged and caused traditional high-touch models to abandon commission-based 
brokerage in favor of charging consumers a percentage of assets under management. Ironically, 
consumers and pension funds may not be experiencing lower fees. As one pension fund has 
commented to us, long-term growth has been adversely affected, and fees to consumers and pension 
funds have not decreased but instead have changed form: Consumers are now charged wrap fees, 
pension funds are charged “2% plus 20% fees,” and more commissions are incurred in smaller 
amounts through higher trading activity. “Fees have simply migrated from the sell-side over to the 
buy-side and shifted the market’s focus from investment to trading — everyone is worse off.” 

What are possible regulatory initiatives that might encourage small and middle 
capitalization companies to conduct IPOs? 
	 First and foremost, the SEC needs to increase incentives for the value providers to invest in reaching 

more investors and creating order flow in small cap stocks in the aftermarket through the addition of 
research, sales and capital to support liquidity. At the same time, the SEC should create disincentives 
for the buy-side to seek executions that compete on cost-of-execution alone. For example, kickback 
practices (e.g., payment for order flow, rebates and executions within the tick size) should be 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 

 

 
  

 

  

 

  
 

 3 SEC Roundtable on Decimalization | Feb. 5, 2013

prohibited and competition should be based uniquely on service, capital commitment to support 
liquidity and the competition of ideas — all essential to the proper functioning of small cap markets 
and largely made extinct by current market structure. 

Will the provisions of Title I of the JOBS Act that provide additional flexibility to small 
and middle capitalization companies with respect to disclosure obligations, internal 
controls, auditing standards, research reports and other matters encourage these 
companies to conduct IPOs? If so, how much? 
	 We are very pessimistic that the provisions of Title I alone will bring back the IPO market to the 

levels that existed in the early ‘90s and ‘80s (400-500 IPOs/year) vs. the 2000s (126 IPOs/year). While 
cost is important to issuers, the data clearly shows that the small IPO market was gutted in 1998 
following the Order Handling Rules and Reg. ATS. Note that Sarbanes-Oxley didn’t come into 
existence until 2002 when the IPO market had already collapsed. See Figure 2. 

Figure 2: The IPO market has never recovered from the New Order Handling Rules and Regulation ATS. 

	 The data is quite striking and the public record shows that practitioners repeatedly warned the SEC 
that the Order Handling Rules, Reg. ATS and Decimalization would harm capital formation. 
Unfortunately, such warnings were dismissed at the time, and the SEC chose to pursue regulations 
benefiting the low-cost trading by consumers. We believe that SEC regulations that resulted in smaller 
tick sizes were a mistake that has cost consumers and the economy upwards of 10 million jobs. The 
SEC now has a great opportunity to fix this mistake. 

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Would increasing minimum tick sizes for trading the securities of small and middle 
capitalization companies materially impact the incentives for IPOs? If so, what 
should the minimum tick size be? 
	 Yes. But the increase in incentives needs to meet two criteria:  1) It has to create meaningful economic 

opportunity for the value providers (sell-side firms providing research, sales and capital commitment 
to individual stocks) to invest in creating investor order flow, and 2) The SEC must ensure that trade-
only execution venues can’t siphon off that flow by competing on price alone through kickbacks 
(payment for order flow, rebates, executions within the minimum tick increment, etc.). 

	 Minimum tick sizes should vary according to the liquidity attributes of the individual stock. Less liquid 
stocks on average will require much higher tick sizes (as much as 25 cents in the extreme situation of 
sub-$100 million market value companies) and larger stocks may do well by 1 cent increments (e.g., 
most S&P 500 stocks). In fact, some academics (including Professor James Angel of Georgetown) 
have argued that large, innately liquid stocks would be made even more liquid by sub-penny tick sizes. 
We agree, but we caution that the associated gaming and quote flickering that smaller tick sizes invites 
is likely to undermine investor confidence and that there is a case to be made to increase tick sizes 
even for large cap stocks if only to simplify markets and restore investor confidence. 

	 We believe that issuers should be given a choice of tick sizes (“Let the market decide.”) rather than 
have regulators substitute their judgment. We believe that all issuers should be given a choice of 
1-cent, 2-cent, 5-cent, 10-cent or 25-cent tick size increments. An “Issuer Choice” model would 
provide an era of mass customization of micro-markets (which would create optimal markets by 
accommodating the full diversity of company sizes and industry factors, including volatility and 
availability of equity research). Consultants would evolve to advise boards. We would very quickly see 
data line up that would define the optimum tick size. Issuers would receive input (solicited and 
unsolicited) from their investors and their value providers. A picture of the optimum tick size would 
emerge. 

	 Alternatively, we could set tick sizes algorithmically. We could have them set to 1 or 2 ticks per 
minimum quoted spread over some period of time. Quoted spreads today are generally much larger 
than 1 cent (even for large cap stocks). However, because it only costs 1 cent to step in front of an 
order, larger spreads are not “bankable” (monetizeable) by the value providers. The lack of a reliable 
economic model for the sell-side impedes investment in research, distribution and the commitment of 
capital to improve liquidity. 

Can issuers effectively address the tick size issue through reverse stock splits or 
stock price range selection at the time of the IPO? 
	 Issuers cannot in most instances effectively address the tick size issue (economic incentive issue) 

through stock splits or price range adjustment. There are two reasons that stock splits won’t work. As 
an example, we will refer to the case of a micro-cap (sub-$500 million and smaller market value 
stocks). (Note: We assume this question meant to say “stock splits” which decrease the share price 
and increase the tick as a percentage of share price and thus the incentive and not “reverse stock 
splits” which increase share prices and thus decrease the tick incentive as a percentage of share price.) 

The first reason that stock splits won’t work is that most micro-cap stocks probably need a 5-cent, 
10-cent or 25-cent tick. Most of these stocks may trade in the $10 to $20 per share price range. So, if 
we split these stocks 5:1 (to create the economics of a 5-cent tick size) we end up with share prices of 
$2-$4, which could cause delisting, loss of margin and other concerns. Tick sizes of 10 cents would 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 

 

  

 

 

 

  
 

  

 

  

 

 

 

 5 SEC Roundtable on Decimalization | Feb. 5, 2013

require stock prices in the $1 and $2 range. Tick sizes of 25 cents would require stock prices that 
automatically delist securities.  

The second reason is that until the SEC ends kickback practices (e.g., payment for order flow, which 
we understand started with Bernie Madoff), rebates and trade executions within the minimum tick 
increment, tick economics will be porous and may not create the incentive that was intended. 

Should minimum tick sizes remain at a specific level only for a certain period after 
the IPO of small and middle capitalization companies? If so, what period would be 
necessary? 
	 Minimum tick sizes should exist as long as the company trades. That said, the minimum tick size 

could be reset periodically — perhaps quarterly or semiannually like major market indices — to reflect 
changes in the underlying liquidity and “ecosystem” supporting the market for the stock. As a 
company grows and more shares are put into the public float, it may determine that a lower tick size is 
in order. It should have the right to choose both larger and smaller tick sizes. Market forces will lead 
issuers to the optimal choice and a picture will emerge. 

What particular problems do small and middle capitalization companies face in the 
current market structure? 
	 The key problem confronting small cap companies is a lack of marketing (redistribution) of their 

shares. Small-cap, micro-cap, nano-cap and, to a lesser extent, mid-cap stocks can have what 
academics call “Asymmetrical order books,” which is the state where there are buyers but not sellers, 
or sellers but no buyers. Historically, that problem was engineered around by what stock exchange 
executives call a “Call market” — where liquidity is aggregated at one or more points during the day 
as opposed to today’s so-called “Continuous markets.” Continuous markets for stocks that trade 
infrequently don’t work very well unless there is an incentive for someone to step in the middle, 
commit capital, provide research and make sales calls. Those incentives were destroyed as a result of 
the regulatory changes between 1997 and 2001, and as a result, liquidity and visibility support for 
stocks has been breaking down, starting with the smallest and moving up market. As the ecosystem 
continues to erode from this so-called “flesh-eating bacteria of tiny tick sizes (and loss of other 
economic incentives)” larger and larger stocks will begin to lose their support. 

	 Contrast today’s electronic 1-cent tick size market with the old higher commission, quarter-point 
quoted spread markets. The old market structure created economic incentives for firms to maintain 
research coverage, make sales calls to a wide variety of retail and institutional investors, and commit 
capital. Today, almost all capital has been taken off of trading desks. As a result of the loss of critical 
economic incentives, so-called “Middle market institutional sales groups” were closed, and the sales 
coverage of the smallest institutional investors by retail brokers was lost. Even if research coverage 
can be found, very little of it is actively marketed to small- and mid-cap long-term investors because 
they cannot properly incentivize Wall Street to pay attention. Over the past decade the system has 
broken down, but the SEC now has an opportunity to be part of a process to rebuild the U.S. capital 
markets. 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 
 

  
 

 

 
  

 

 
 

 
 

 

  
 
 
   
   
  
  

    
  

 

 
 

 

 6 SEC Roundtable on Decimalization | Feb. 5, 2013

Is the level of liquidity provided for securities of small and middle capitalization 
companies inadequate today? If so, to what extent has this problem been 
exacerbated by smaller tick sizes? 
	 Yes. Absolutely, the level of liquidity has been breaking down. It is acute for the smallest stocks. Why?  

Because only large stocks have enough investors following them at any point in time to ensure a 
naturally liquid market where buyers and sellers interact. Please refer to the testimony of Kevin 
Cronin, who represented the Investment Company Institute on June 20 in the House of 
Representatives, and Andy Brooks of T. Rowe Price in the Senate on September 20. Long-term 
institutional investors in smaller cap stocks all understand that the ecosystem is in peril and that 
institutional liquidity has been compromised. There are increasing calls by institutional investors to 
increase tick sizes and improve the economic incentives to provide liquidity in stocks that are not 
naturally liquid. 

Are there other factors that significantly impact the liquidity and trading of small and 
middle capitalization companies? If so, what are possible regulatory solutions to 
improve the market structure for them? 
	 The key factor impacting liquidity is the economic incentives (or lack thereof) for the liquidity 

providers in small-cap stocks to support and reach long-term investors. Economic incentives may take 
a variety of forms: 
 Regulated commissions (ended on May 1, 1975, with the deregulation of commission structures). 
 Quoted markets (as opposed to electronic markets). Quoted markets permit risk management by 

dealers who are not obligated to take a trade.
 
 Higher tick sizes. 


	 Economic incentives to provide support services for stocks are undermined when the price of the 
execution becomes the primary determinant of order flows. There are a litany of practices that may 
undermine value-added support services and erode the small cap ecosystem, including:   
 Payment for order flow 
 Commission sharing, rebates, etc. 
 Electronic order books 
 Proliferation of tick sizes (smaller and smaller tick sizes) 
 Trading within the tick size 
 Best execution (the definition overly relies on commissions) 
 Rankings and Reporting of fund expense ratios (as opposed to absolute and relative return) 

Would increasing minimum tick sizes for trading the securities of small and middle 
capitalization companies improve their market structure by enhancing economic 
incentives for market making? 
	 Yes, increasing minimum tick sizes will improve market structure for small stocks, but only if you also 

plug the economic leakage/kickbacks that could subvert the intent of changes in tick sizes, including  
payment for order flow, commission sharing, rebates, and trading within the tick size. The market 
should be first-come, first-served (time and price priority with higher tick sizes would increase 
investor confidence — it is inherently fair), and participants should be encouraged to compete on 
service and not simply on price. Liquidity provision is a service. Research is a service. Sales is a 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 

 

  
 

 

 

 
 

 

  
  

  
 

  
 

 7 SEC Roundtable on Decimalization | Feb. 5, 2013

service. The current market structure has focused on relentless price competition, which only works 
for large-scale liquid stocks but is a disaster for the vast majority of issuers who require service 
support — liquidity, research and sales — to trade successfully on public markets. 

Would increasing tick size improve the availability of research on small and middle 
capitalization companies? 
	 Again, yes it will, if the economics follow to the firms that provide the research, sales and capital 

support. However, the SEC must ensure that strategies that compete on price alone cannot 
disintermediate the value providers. Please note that the smallest stocks will still be illiquid and one 
might argue that they probably should not be public. That said, there is no reason why — with the 
right stock market structure optimized for smaller issues — that a $25 million IPO can’t be successful 
and supported in the aftermarket. However, it will take the rebuilding of the small broker dealer 
community that has been largely starved out of supplying research, sales and capital support to small 
companies. See Figure 3. 

Figure 3: $25 million IPOs have virtually disappeared, as the economics no longer exist for the value 
providers to support these stocks in the aftermarket. 

From the perspective of investors, would the potential benefits of increased liquidity 
outweigh the potential reduction in price competition? 
	 The benefits of increased liquidity absolutely outweigh the potential for reduction in price 

competition. Today’s market structure: 
 Caters to traders who front-run investors. 
 Undermines investor confidence by adding to quote flickering and the appearance of price 

volatility. 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

  
 

 

  
 

 
 

 

  

 8 SEC Roundtable on Decimalization | Feb. 5, 2013

 Undermines capital formation and job growth, and exacerbates unemployment. 
 Drives down the potential for investment returns by undermining economic growth (investment 

returns are ultimately tied to the rate of economic growth). 

Is the impact different for institutional and retail investors? 
	 Institutional and retail investors have been fleeing small cap stocks, but for different reasons. For 

institutions, it is the loss of liquidity. The largest institutional investors have been cutting their 
allocations to the smaller stocks because of this loss of liquidity. There is a saying that “stocks are 
sold, they’re not bought,” and this is particularly the case with retail investors and small-cap stocks 
(non-household names). With the gutting of economic incentives for value providers to market stocks 
to retail, retail investors have been deprived of exposure to individual stocks. While the original 
intention of the SEC may have been to eliminate sales practice abuses by eliminating sales incentives, 
the unintended harm to the economy is now clear. By increasing sales incentives, the SEC and 
FINRA will have to ensure that rules protecting consumers are enforced. 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 
 

 
 

 

 
  

 
 

 
 

 

 

 

 
 

 9 SEC Roundtable on Decimalization | Feb. 5, 2013

Panel 2 — Evaluating Concerns Relating to 

Tick Size for the Securities Market Generally 


What impact has decimalization had on the securities market in general? 
	 Decimalization has depressed the IPO market, led to a decline in the number of listed companies (a 

loss of 44% of listed companies since the peak in 1997), compromised U.S. economic growth, 
undermined investment returns and added to unemployment. It has also likely undermined retail 
investor confidence due to casino-like trading, quote flickering and stepping-ahead (cat and mouse) 
practices pursued by certain computer-based strategies. 

	 Decimalization (broadly defined to encompass the Order Handling Rules, Reg. ATS, Decimalization 
and Reg. NMS) has set the U.S. stock market into a long-term secular decline. 

What problems has decimalization caused? What benefits have been realized? Do the 
benefits of decimalization outweigh any such problems? 
	 Consumers and institutional investors have had their costs decreased in the trading of large cap stocks 

and these stocks tend to trade continuously even during crises. This is a benefit. But one could say 
that there isn’t that great a benefit in making already-liquid stocks more liquid when the cost is making 
already-illiquid stocks more illiquid. 

	 The cost of applying this one-size-fits-all, penny-tick-size electronic market structure to small cap 
stocks is the collapse of the U.S. capital markets — our country’s economic growth engine. The SEC 
now has an opportunity to re-establish the U.S. capital markets as the envy of the world. 

	 The benefits of decimalization do not outweigh the undermining of U.S. competitiveness and 
economic growth that has ensued. We should have capital markets that work effectively for both large 
and small-cap stocks. Changes can be made that retain most of the benefits of decimalization while 
correcting its corrosive effects on small cap stocks. One-size-fits-all rules cannot work for all sized 
stocks. We must never again lose sight of the need to balance the needs of all constituents, including 
institutional investors, issuers and the value-providing dealers specializing in research, sales and 
liquidity support for small cap companies. 

Is it advisable to broadly re-evaluate minimum tick sizes in the U.S. securities 
market?  
	 It would be a dereliction of public trust not to re-evaluate minimum tick sizes and fix our stock 

markets so that they work for all participants and help to restore growth in the U.S. economy. 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

  
  

 
 

 
 

 

 

  
 

 

  
 

 
 

  
  

 
  
  
  
  

 

 
 

 

   

 10 SEC Roundtable on Decimalization | Feb. 5, 2013

Should consideration be given to reducing minimum tick sizes for other types of 
securities such as those of very liquid large capitalization companies? 
	 The marginal value of decreasing tick sizes in large cap stocks is that we make liquid stocks more 

liquid at the expense of possibly undermining retail and consumer confidence since it will usher in 
more gaming strategies. If the SEC wants to improve investor confidence, one way is to cut 
complexity. Fewer price points (higher tick sizes) is one way to cut complexity (and cut down on the 
gaming of investors). From a public policy perspective, the SEC should consider allowing large cap 
companies to increase tick sizes within a narrow range (say 1-5 cents). We don’t embrace the idea of 
the SEC setting tick sizes, unless it is through some governance structure that includes the value 
providers, relevant investors and the issuers. We think that allowing all issuers to choose their own 
tick size will give issuers a seat back at the table and force them to understand the impact of market 
structure on cost of capital. This would, we believe, create a beneficial dialogue, restore balance and 
lead to a renaissance in capital formation, job growth and long-term investment returns. Issuers will 
choose to cater their choice to needs of investors and not to short-term traders. As a result, choice of 
tick sizes could do much to bring America back to the basics of fundamental investing. 

What should be the factors in determining optimal minimum tick sizes? 
	 Tick sizes should be related to: 
 The natural liquidity (measured as the dollar volume of transactions in the course of a day) in the 

stock. 

 The level of research 

 The availability and need for capital to support liquidity. 


	 Higher tick sizes will increase all of the above assuming that it is not subverted by kickbacks (payment 
for order flow, trading within the tick, rebates, etc.). 

Should the minimum tick size vary with the price of a security, its liquidity, the size of 
the issuer, or other characteristics? 
	 The market (Issuer’s Choice) should determine tick sizes within a range of choices, say: 
 1 cent 
 2 cents 
 5 cents 
 10 cents 
 25 cents 

	 “Share price,” which is the standard that most foreign markets use to vary tick sizes, is archaic and 
largely irrelevant (issuers can split their share prices to arrive at the appropriate ratio for their stock if 
enough variety in tick-size choice is established). 

	 Tick size (and other economic incentives such as commissions) can pay for required support services 
that keep a stock visible (e.g., research and sales) and liquid (e.g., capital). The key determinants for 
any issuer will thus be: 
 The level of liquidity for fundamentally oriented long-term institutional investors in the stock (not 

to be confused with volume),  

 The level of sell-side equity research coverage, and 


© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 

 
  

 

 
  

 
 

  

   

 
 

  

 11 SEC Roundtable on Decimalization | Feb. 5, 2013

	 The level of stability and fairness that they wish to project (higher tick sizes will project a higher 
level of price stability and limit the perception by individual investors that they are being “gamed” 
by algorithmic and high-frequency traders). 

Are there international models that might provide a good example of tiered minimum 
tick sizes?  
	 No. All of the international models that we are aware of vary tick size by share price and the tick size 

increments are too small to attract the needed levels of sponsorship. However, we believe that new 
tick-size regimes will emerge internationally as we have been contacted by a number of non-U.S. stock 
exchanges and at least one non-U.S. regulator. 

Should the minimum tick size be mandated for all securities, or should issuers or 
primary listing markets be allowed to choose? 
	 Minimum tick sizes should not be mandated for all securities. The SEC has neither the ability nor the 

budget to consider all the factors that an issuer would consider. 
	 Minimum tick sizes should not be chosen by primary listing markets. As for-profit trading-

dependent entities, they are likely to be conflicted, and their interests will be at odds with the needs of 
issuers. 

	 Minimum tick sizes should be chosen by issuers, with the input of their investors and investment 
banks. Let the market decide! The fact is that markets change and the availability of support for 
issuers changes over time. The imposition of an outside or one-size-fits-all standard on issuers is what 
caused the problem of one-size-fits-all stock markets in the first place. 

	 Note – America will be better off for “Issuer-choice” of tick sizes, and issuers will be up to 
the task of making informed choices as consulting reports from listed exchanges, investment 
banks and third-party consultants become available. A clear picture of optimal tick sizes will 
emerge from a market-based solution. 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 
  

 

 

 
  

 
  
  
 

  
  

  
 

 
 
 

 
 

  

 12 SEC Roundtable on Decimalization | Feb. 5, 2013

Panel 3 — Studying the Effects of Alternative 
Tick Sizes 

What is the best way to study the effects of decimalization on small and middle 
capitalization companies? 
	 Understand that this problem was caused by 15 years’ worth of erosion in the ecosystem of sell-side 

sales, research and capital providers. Rebuilding that ecosystem will take permanence in any solution. 
So our view is that the SEC should simply effect a wholesale and permanent change allowing a range 
of choices in tick sizes for all public companies (e.g. 1 cent, 2 cents, 5 cents, 10 cents and 25 cents).  

	 We believe that the root problem was the tripartite combination of the Order Handling Rules, 
Reg. ATS and Decimalization. We can see no evidence that the effects of the Order Handling 
Rules and Regulation ATS were ever part of a pilot program, and even if they had been, such 
a study — unless it were long-term in nature — could not have uncovered the long-term 
impact on the support of small cap stocks, Wall Street distribution, sell-side equity research 
and institutional investor avoidance of smaller companies due to lack of liquidity. 

	 So we believe that any study needs to be: 
 Widespread (500 or more public companies). 
 Representative of all market cap strata (nano-, micro- , small- and mid-cap). 
 Long-term (five years). 
 Terminated early only where it is apparent that there are benefits and that the terms (higher tick 

sizes) should be extended to all issuers. 

 Allow all IPO candidates to elect into higher tick sizes.
 
 Prohibit “kickback” practices (payment for order flow, rebates, trading within the tick, etc.).
 

Is it feasible to isolate the impact of decimalization on IPOs? If so, how? 
	 Not adequately. The ecosystem of equity research support, broad distribution (sales) support and 

capital commitment will need to be rebuilt, and that will take time. Most pilot studies will measure 
short-term effects. Long-term, when the ecosystem does come back, it will cause the following effects: 
 More capital will be brought to smaller public companies. 
 Share prices will perform better. 
 More companies will be attracted to the IPO market because the aftermarket will sustain higher 

share prices and thus a lower cost of capital.
 
 Higher rates of investment in private companies will occur as investors in private companies 


become more confident of the IPO market as an exit path.
 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 
 

 
 

 

   
  

 
 

 

 
 

 
 
  

 

 

 13 SEC Roundtable on Decimalization | Feb. 5, 2013

 U.S. economic and job growth will improve. 
 More IPOs will be successes for issuers, rather than the failures that the majority of them have 

been. See Figure 4. 

Figure 4: IPO success rates have been declining even as company sizes have increased. We believe this 
is due to changes in market structure (Order Handling Rules, Reg. ATS and Decimalization). 

What data would be needed to support changing the minimum tick size for all or a 
subset of stocks? 
	 We believe that no additional data is needed. The evidence of erosion in small cap stocks due to a lack 

of adequate economic incentives is overwhelming. 
	 Any pilot of higher tick sizes will likely show the reverse effects of the studies that measured the 

impact of decimalization when it was implemented in 2001. Studies show that there was a 
proliferation of price points and a loss of order depth. 

	 By increasing tick sizes (and plugging “Kickback” schemes that undermine the intent) we would 
expect to see: 
 Fewer price points. 
 Higher visible order depth. 

	 We would encourage the SEC to survey sell-side firms specializing in the support of small-cap and 
micro-cap stocks (e.g. Cowen, Piper Jaffray, William Blair, and Sandler O’Neill) on how it could be 
expected to affect their interest/ability to support small cap stocks. 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 
 

   
 

  
 

 
 

  

 
 

 
  

 

 

 
  
 
  

 
   

 

  
 

 

 14 SEC Roundtable on Decimalization | Feb. 5, 2013

	 We would encourage the SEC to survey buy-side investors (both portfolio managers and traders, 
including firms like T.Rowe Price, Wasatch Advisors and Emerald Asset Management) on how it has 
impacted their interest in small-cap and micro-cap stocks. 

How can the Commission or exchanges generate additional studies of the impact of 
minimum tick sizes on the liquidity and trading of securities of small and middle 
capitalization companies? Is this best done through a pilot program in which the 
minimum tick size is actually changed for a control group of securities? If so, how 
should such a pilot program be designed? 
	 We believe this is best done by letting the market decide and going to a “permanent” and market-wide 

Issuer-Choice model. The concern we have with a pilot is that it isn’t permanent: 
 What ecosystem providers (research, sales and capital providers) will make long-term hiring 

decisions based on something that is possibly temporary? 

 What institutional investors will change their investment strategy on the basis of a potentially 


temporary structural change? 


	 The solution itself will be its own pilot. The SEC can always revisit it if the data that emerges dictates 
any sort of course correction. 

Should the Commission assess the impact of minimum tick sizes on the full range of 
equity securities, including those of large capitalization companies? 
	 Yes. The evidence is clear from the work of micromarkets economists that smaller tick sizes make 

naturally liquid (mostly large cap) stocks more liquid; and larger tick sizes make naturally illiquid 
(mostly small- and micro-cap) stocks more liquid. However, we believe that the marginal value of 
increased liquidity in sub-penny tick sizes for large cap stocks is far outweighed by the loss of 
confidence that could ensue from smaller tick sizes. We believe that larger tick sizes, even in large cap 
stocks, would improve investor confidence by: 
 Increasing the perception of price stability (cuts quote flickering). 
 Cutting cat-and-mouse (stepping in front) behaviors. 
 Moving volume into the “lit” markets and out of the “dark” (dark pool) markets. 

Should OTC executions in increments less than the minimum tick size (i.e., subpenny 
price improvement) be prohibited during a pilot period? 
	 Yes, OTC executions in increments less than the minimum tick size should be prohibited. Any 

executions that subvert the integrity of the intended increase in tick economics will undermine the 
economic incentives to support less liquid stocks. Sanctioned kickback structures of all stripes should 
be prohibited, including executions in increments less than the minimum tick size, payment for order 
flow and other forms of economic rebate. We also believe that by creating one set of rules with clear, 
simple definitions, the Commission will give individual investors greater confidence in the market 
(everyone is treated the same), and some liquidity will shift from the dark markets to the lit markets 
which will foster greater transparency in markets. 

What criteria should be used to select securities for participation in a pilot? 
	 We believe that, instead of a pilot program, a choice of tick sizes should be implemented across the 

entire market. However, if there were to be a pilot, there should be an effort to create a “pairs 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 
 
 
 
 

  
   

 

 
 

  
 
 
 

 
   

 

 

  

 

 

 
  

 
 

 

 15 SEC Roundtable on Decimalization | Feb. 5, 2013

matched control group of 500-plus stocks that are in the pilot with another 500-plus stocks not in the 

pilot.”  They should be matched for:
 
 Industry 

 Size (a selection of nano-cap, micro-cap, small-cap and mid-cap stocks) 

 Level of liquidity (not volume) 

 Level of sell-side research coverage 


What minimum tick sizes should be used for a pilot program, and to which types of 
securities should they apply? 
	 We prefer a limited number of tick sizes to test a broad range of outcomes, but not so many different 

tick sizes that it becomes overwhelming to this process. We would prefer tick sizes that make the 
math easy. We would urge the following choices: 
 25 cents (nano-cap — sub-$100 million market value stocks — may need to be quite large, given 

their innately illiquid nature) 

 10 cents
 
 5 cents (might be interesting even to large cap stocks to cut gaming) 

 2 cents (might be interesting even to large cap stocks to cut gaming) 

 1 cent 


To what extent should issuers have input into the participation of their securities in 
the pilot? How long should a pilot program last? What are the most useful research 
questions that could be examined from such a pilot program? 
	 We believe that there is a strong rationale to dispense with a pilot and simply let all issuers decide for 

themselves what their tick size should be from a narrow range of options (1 cent, 2 cents, 5 cents, 
10 cents, 25 cents). However, if the SEC insists on running a pilot (which could not possibly 
demonstrate a reversal of the damage to the ecosystem that was caused by Decimalization), then it 
might be impractical to let issuers choose/give input and achieve the quality of data (pairs 
comparisons) desired by a study of this type. 

Is public data sufficient for addressing these questions in the context of a pilot? If 
not, what questions cannot be addressed with public data and what additional data 
would be needed to address these questions?  
	 It will be important to survey sell-side small-cap specialist firms for how they believe such changes, if 

made permanent, would impact how they look at their sales departments (breadth of institutional 
coverage), research departments (willingness to cover small cap stocks), and their appetite to commit 
and add capital to support institutional trading. 

	 It will be important to survey buy-side small-cap specialist firms for how permanent changes might 
affect the level of investment interest in small-cap stocks. 

Who is likely to study and to provide analysis of a tick size pilot (e.g. academics, 
exchanges, industry groups, others)? 
 The primary analysis will come from: 
 Micromarkets economists in the United States and abroad (there is quite a bit of interest in this 

subject in Europe). 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

 
 

  
  

  

 

  
 

 

 
  
 

  
  

 
  

  

 

 

 

 

 16 SEC Roundtable on Decimalization | Feb. 5, 2013

 Stock exchanges. 
 Groups that have historically funded analysis to protect their interests (these might include HFTs 

and Dark Pools, for example). 

Are there particular risks associated with conducting a pilot program? If so, what is 
the best way to mitigate these risks? 
	 The primary risk is that economic kickback schemes (trading within the tick size, payment for order 

flow, rebates, etc.) would undermine the integrity of any pilot program. The SEC must promulgate 
and implement a set of rules that prohibit all such practices as part of any pilot (or full 
implementation). 

What are the costs associated with a pilot and how does the design of a pilot affect 
those costs? 
	 Other entities — such as sell-side firms — are better suited to discuss the cost. However, at a dinner 

on September 6, 2011, where we first suggested the idea of higher tick sizes to a broad cross-section 
of Wall Street sell-side, former stock exchange and other personnel, the immediate consensus was 
that: 
 Higher tick sizes would be simple to implement. 
 Higher tick sizes would retain the broader market structure (e.g., not require an exemption from 

Reg. NMS) and thus would be very cost effective for the industry to implement. 
 Higher tick sizes would lead to improvements in liquidity, capital formation and economic growth. 

Are there better ways to gather reliable data on the impact of minimum tick sizes on 
the securities of small and middle capitalization issuers? 
	 We would recommend a review of the global micromarkets economic literature, which we believe 

clearly shows that higher tick sizes will result in improved liquidity for naturally illiquid stocks. See 
also “The trouble with small tick sizes” by David Weild, Ed Kim and Lisa Newport, which was 
published by Grant Thornton in September 2012. 

© 2013 Grant Thornton LLP. All rights reserved. 



 

 

  

  

 

 

 

 

 

 

  

 17 SEC Roundtable on Decimalization | Feb. 5, 2013

Additional materials 


June 8, 2012, presentation to SEC’s Advisory Committee on Small and Emerging Companies 

June 20, 2012, testimony to the House Financial Services Committee, Subcommittee on Capital Markets 

September 7, 2012, presentation to the SEC’s Advisory Committee on Small and Emerging Companies 

Why are IPOs in the ICU? 

Market structure is causing the IPO crisis — and more 

A wake-up call for America 

The trouble with small tick sizes:  Larger tick sizes will bring back capital formation, jobs and 
investor confidence 

Wall Street Journal OpEd entitled, “How to revive small-cap IPOs,” October 27, 2011 

© 2013 Grant Thornton LLP. All rights reserved. 

http://www.sec.gov/news/otherwebcasts/2012/weild_060812.pdf
http://financialservices.house.gov/uploadedfiles/hhrg-112-ba16-wstate-dweild-20120620.pdf
http://www.sec.gov/info/smallbus/acsec/acsec-090712-weild-kim-slides.pdf
http://www.grantthorton.com/staticfiles/GTCom/files/GT Thinking/IPO white paper/Why are IPOs in the ICU_11_19.pdf
http://www.gt.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/?vgnextoid=5bbe3429935bd110VgnVCM1000003a8314acRCRD&vgnextfmt=default
http://www.gt.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/?vgnextoid=17aeabadedb94210VgnVCM1000003a8314acRCRD
http://www.gt.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/?vgnextoid=fc1f5aee2d0e9310VgnVCM1000003a8314acRCRD
http://www.google.com/url?sa=t&rct=j&q=how%20to%20revive%20small-cap%20ipos&source=web&cd=1&ved=0CDIQFjAA&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052970203554104577001522344390902.html&ei=jGUIUav4Bo3D0AGfyIDYDA&usg=AFQjCNEfa8kiHr5My10cktRX7rpzehFdeQ&bvm=bv.41642243,d.dmQ&cad=rja


 

 

 

 

 

 

 

 

 

 

SEC Roundtable on Decimalization | Feb. 5, 2013 18 

About David Weild 


David Weild is a Senior Advisor to Grant Thornton LLP’s Capital Markets Group, which provides strategies 
and insights into today’s global capital markets. 

Experience 
David is the Chairman & CEO of Weild & Co. (formerly Capital Markets Advisory Partners) and the former 
vice-chairman and executive vice-president of The NASDAQ Stock Market, with oversight of the more than 
4,000 listed companies. Prior to NASDAQ, he spent 14 years at Prudential Securities in a number of senior 
management roles, including president of eCommerce, head of corporate finance, head of technology 
investment banking and head of equity capital markets in New York, London and Tokyo. He worked on 
more than 1,000 IPOs, follow-on offerings and convertible transactions and was an innovator of new issue 
systems and securities underwriting structures, including the use of Form S-3s to mitigate risk for small 
capitalization companies raising equity and convertible debt capital. He created the Market Intelligence Desk 
— or “MID” — while at NASDAQ to support issuers in their quest to better understand what was 
impacting trading in their stocks. 

Education 
David holds an MBA from the Stern School of Business and a BA from Wesleyan University. He has studied 
on exchange at The Sorbonne, Ecole des Haute Etudes Commerciales and The Stockholm School of 
Economics. 

Industry participation 
David has participated in the NYSE’s and National Venture Capital Association’s Blue Ribbon Regional Task 
Force to explore ways to help restore a vibrant IPO market and keep innovation flourishing in the United 
States, and is Chairman of  the International Stock Exchange Executives Emeriti (ISEEE) Small Business 
Financing Crisis Task Force. He served as Director of the National Investor Relations Institute’s New York 
chapter and Helium.com (sold to RR Donnelly) and currently serves as a Director of Hanley & Associates 
and as Chairman of the Board of Tuesday’s Children, the non-profit that serves 9/11 families, first 
responders and their families. David testified before the CFTC-SEC Joint Panel on Emerging Regulatory 
Issues in the wake of the May 2010 “flash crash,” and before the SEC Advisory Committee on Small and 
Emerging Companies on June 8, 2012 and again on September 7, 2012.  He has also testified in Congress and 
is often interviewed by the financial news media. 

© 2013 Grant Thornton LLP. All rights reserved. 

http:Helium.com


 

 

 

   
  

 

SEC Roundtable on Decimalization | Feb. 5, 2013 19 

Publications 
David and Edward Kim have co-authored a number of Grant Thornton studies, including Why are IPOs in the 
ICU? in 2008. Released in the fall of 2009, Market structure is causing the IPO crisis (updated by Market structure is 
causing the IPO crisis — and more in 2010) and A wake-up call for America have been entered into the 
Congressional Record and the Federal Register. They also authored the chapter, Killing the Stock Market That 
Laid the Golden Eggs in the recent book on high frequency and predatory practices entitled, Broken Markets, by 
Sal Arnuk & Joseph Saluzzi, published in May 2012 by FT Press (Financial Times). Their most recent study 
on the impact of Decimalization, The trouble with small tick sizes, was released in the fall of 2013. 

© 2013 Grant Thornton LLP. All rights reserved. 

http://www.grantthorton.com/staticfiles/GTCom/files/GT Thinking/IPO white paper/Why are IPOs in the ICU_11_19.pdf
http://www.grantthorton.com/staticfiles/GTCom/files/GT Thinking/IPO white paper/Why are IPOs in the ICU_11_19.pdf
http://www.gt.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/?vgnextoid=5bbe3429935bd110VgnVCM1000003a8314acRCRD&vgnextfmt=default
http://www.gt.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/?vgnextoid=5bbe3429935bd110VgnVCM1000003a8314acRCRD&vgnextfmt=default
http://www.gt.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/?vgnextoid=17aeabadedb94210VgnVCM1000003a8314acRCRD
http://www.gt.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/?vgnextoid=fc1f5aee2d0e9310VgnVCM1000003a8314acRCRD20 SEC Roundtable on Decimalization | Feb. 5, 2013

About Grant Thornton LLP 


Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global 
audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a 
worldwide partnership, as each member firm is a separate and distinct legal entity. 

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Grant Thornton 
An instinct for growth" 

© Grant Thornton LLP 
All rights reserved 
U.S. member firm of Grant Thornton International Ltd 



 

David Weild, Edward Kim and Lisa Newport September 2012 

The trouble with small tick sizes 
Larger tick sizes will bring back capital
 
formation, jobs and investor confidence
 
Capital Markets Series 



 
 

 
 

 

 
 

 
 

 
 

 
 

 

The authors gratefully acknowledge the 
contributions of Adele Hogan to the legal and 
regulatory aspects of this report, including 
the enclosed draft legislation and phase-in 
implementation schedules that we are 
providing to inform the discussion. 

Adele Hogan is a corporate and securities 
lawyer at Sheppard Mullin Richter & 
Hampton LLP in New York City. Over the 
course of her career, Hogan has completed 
more than $250 billion in corporate deals. 
She was previously the chair of the New 
York City Bar Association’s Securities 
Regulation Committee and its Financial 
Reporting Committee. 



  
   
   
   
  
    
  
   
   
  
   
   
   
  
   
   
  
   
  
  
   
   
   
  
  
  
  
  
  
  

Contents 
1 Executive summary 
5 Tribble troubles (penny tick sizes) 

10 Title I, Section 106(b): The hope inside the JOBS Act 
17 Growing recognition that tick sizes must be increased (at least for 

small-cap stocks) 
21 The SEC’s Report to Congress on Decimalization: Missing the 

forest for the trees 
25 Eating away at the “on-ramps” (small investment banks) 
27 Eating away at IPO aftermarket profitability (support for public 

companies) 
28 Small-caps can’t create systemic risk (so why not build a small-cap 

market to drive growth?) 
30 The effective representation of corporations (the job creators) 

was destroyed 
32	 Why some large investment banks, large investors and stock 

exchanges fight for smaller tick sizes, despite their negative 
impact on the economy 

33	 Beware of the hidden agendas of those who champion smaller 
tick sizes 

34 Tick sizes: The academic perspective and international practices 
37 Recommendations and conclusions 
41 Appendix A: Proposed preliminary draft legislation: The JOBS Act, 

Part 2 
44 Appendix B: Proposed preliminary phase-in implementation plan 
52 Appendix C: Tick size standards around the world 
58 Appendix D: Tick size changes on the NASDAQ, NYSE and AMEX 
60 Appendix E: IPO economics 
61 Appendix F: IPO success rates 
64 References 
66 About the authors 





  

 
 
 

 
 

 
 

 
 

 

	 	 	 	 	 	 	 	 	
 

 

	 	 	 	 	 	 	 	
 

	 	 	 	 	 	 	 	 	
 

 

 
 

 
 

 
 

 
 
 

 
 

 
 
 

 
 
 

 
 

 
 

 
 

    
   
 

 
 

 
  

 

Executive summary
 

The Jumpstart Our Business Startups (JOBS) Act, signed into 
law on April 5, 2012, delivered two of the three legs of the stool 
required to revive the U.S. IPO market: 1) a framework to lower 
costs for small companies accessing the public markets, and 2) a 
framework to improve company communication with investors 
in the public and private markets. The authors argue that a 
framework to realign economic incentives in the public markets, 
primarily through a higher tick size (the minimum increment in 
which a stock or other security can trade) pricing regimen, is the 
essential third leg that is currently missing from the stool. The 
authors conclude that higher tick sizes will: 
•	 lead to investment in the ecosystem (research, stock sales, 

investment banking and capital commitment to provide 
institutional liquidity) required to successfully take 
companies public and support them in the aftermarket; 

•	 favor long-term investors and stock pickers over short-term 
traders; and 

•	 increase investor confidence by reducing the number of price 
points at which stocks are traded and by limiting computer 
trading behaviors. 

The authors contend that the current penny and sub-penny 
tick size regimen, especially as applied to less-visible and less-

liquid stocks — the natural state of most public companies 
and nearly all small public companies — is at the root of the 
systemic decline in the U.S. IPO market and that it contributes 
to trading behaviors that undermine investor confidence. 
While the current system may be tolerable (trading behaviors 
aside) for large-cap and mid-cap stocks with adequate natural 
liquidity and visibility, it is detrimental to issuers and investors 
in the more than 80% of listed companies that are small-cap 
and smaller and do not enjoy natural liquidity and visibility. 
They offer quantitative and qualitative evidence that the 
majority of harm to the U.S. IPO market was caused in 1997 
and 1998 by the implementation of the Order Handling Rules 
and Regulation Alternative Trading Systems, which caused 
the bankable spread1 available to small investment banks to 
drop from 25 cents per share to the minimum tick sizes of 6.25 
cents (for NASDAQ stocks priced greater than $10) and 3.125 
cents (for NASDAQ stocks priced under $10). This shift, from 
a quote-driven to an electronic-order-driven market, set the 
conditions under which decimalization would be implemented 
in 2001. However, decimalization, which further eroded the 
bankable spread from 6.25 cents and 3.125 cents to 1 cent, was a 
comparatively minor change — essentially a coup de grâce that 
removed any remaining economic incentives required to sustain 
a vibrant market and help support the U.S. economy. 

The most important provision of the Jumpstart Our Business Startups (JOBS) Act, signed into law on April 5, 2012, is a little-known section (Title I, Section 106(b)) titled 
“Other Matters — Tick Size.” In it, Congress requires the SEC to conduct a study on the “transition to trading and quoting securities in one penny increments, also known as 
decimalization... [and] the impact that decimalization has had on the number of initial public offerings since its implementation relative to the period before its implementation.” 

In our view, decimalization — a euphemism for the collapse in trading spreads, tick sizes and commissions — decimated the U.S. IPO market when it began in earnest 
with the 1998 implementation of Regulation ATS (alternative trading systems). 

Adding back adequate economic incentives (through higher tick sizes, which may be the simplest way to accomplish this) to make the aftermarket support of small public 
companies once again profitable is likely the best way to achieve Congress’s intent to bring back the small IPO and associated job growth. 

This is a notion that the authors use to describe how spreads are seen from the vantage point of market makers. It is the portion of a spread that market makers can reasonably rely 
upon to compensate them for their investment in capital, research and sales support. In a quote-driven market (pre-1998), bankable spreads were largely equivalent to quoted spreads, 
while in the electronic-order-driven market (post-1998), bankable spreads fell to the minimum tick size. 

The trouble with small tick sizes 1 

1 



 

  
 

 
 
 
 

 
 
 

 

 
 
 

  
 
 
 

 

 

 
 

 
 

 

 
 

 
 

 

 
 

 
 

 

 
 

    
  
  
 
  
  

 

The authors recommend two alternative solutions — 
encompassed in what we call The Jobs Act, Part 2 — to 
customize tick sizes2 and create needed economic incentives 
to rebuild the ecosystem to support capital formation. Such 
solutions, which can be used individually or in combination, 
should be implemented via an SEC pilot program to provide 
valuable information before fully phasing in the solutions across 
the entire market.3 Both solutions rely on market forces to select 
tick sizes, as opposed to the current SEC-mandated system. The 
two recommended alternative solutions (which may be used in 
combination4) are as follows. 

1.	 Issuer choice of tick size, where issuers of all sizes, but small-
cap companies in particular, are given the authority to choose 
their own tick size within a range that is capped at a maximum 
of some percentage — say, 5% — of their share price. 

An issuer’s board of directors would choose its tick size by 
consulting with institutional investors, investment banks and 
stock exchanges in order to arrive at an optimal increment for 
its shares that would address both the needs of the ecosystem 
and the liquidity in its shares. 

Pros Cons 

Empowers issuers. 

Enables mass customization of micromarkets. Eliminates the one-size-fits-all 
penny and sub-penny market structure that many believe is undermining 
capital formation and job creation. 

Educates management and boards by compelling them to engage in a 
discussion with investors, stock exchanges, investment banks and other 
advisers on how choice of tick size may impact equity research coverage, 
capital commitment, liquidity and investor interest. 

Creates a wide variety of data for analysis that will paint an unprecedented 
picture of how tick sizes impact market quality (e.g., volume, liquidity, 
volatility, research coverage). 

Will curtail speculative and high-frequency trading by adding “friction” (cost) 
to trading, thereby favoring fundamentally oriented, long-term investors. 
Will increase the incentive for stockbrokers to market shares to investors. 

Shifts “aftermarket support” back to Wall Street and may allow management 
to focus more time and energy on running the business. 

Increases complexity, which is why some prefer to limit the tick size options to 
simple increments of 1 cent, 5 cents, 10 cents, 20 cents, 50 cents and even 
$1 increments on high-priced stocks. 

Issuers will have to invest time in understanding market structure, but this 
understanding should pay dividends by making issuers better equipped to 
interact with investors and investment banks. 

Anytime incentives are increased to market stocks to investors, there is 
potential for increases in sales practice abuses. This will require increased 
enforcement on the part of the SEC and FINRA. 

2	 Liquidity rebates, payment for order flow, executions within tick increments through dark pools and other mechanisms that effectively enable trading within established tick sizes should be 
eliminated to create tick size “integrity.” Everyone in the market should obtain the same tick economics which will enhance investor confidence through a sense of fairness and transparency. Tick 
size integrity will also encourage competition on the basis of innovation and value creation — not simply trade economics to the dealer at the expense of investor best interests. The result will be 
to improve “best execution.” 

3	 The SEC has traditionally used pilot programs as a test and phase-in implementation strategy. 
4 	 In the instance where the “issuer choice” alternative is used, for issuers that have not affirmatively made a choice in tick size, there might be a default option. That default option could be fulfilled 

by “algorithmic customization” of the issuer’s tick size. 

2 The trouble with small tick sizes 



  

 
 

 

 
 

 
 

 

  

 
 

 
 
 

 
 

  
 
 
 

  

  
 
 
 

 
 

 
 

 
 

    
 

  
  
  
 
  
   

   
  
 

2.	 Algorithmic customization of tick size, where the SEC 
could automate the “mass customization” of tick sizes via 
a simple algorithm that establishes increments at one-half 
of the average quoted spread of a stock over some defined 
period of time, e.g., trailing 12 months.5 

Stock exchanges increasingly acknowledge that today’s 
market structure is effective only for a small minority of 
innately liquid, mostly large-cap stocks, and that higher 
priced and less-liquid stocks could benefit from higher-
tick sizes, while lower-priced and extremely liquid stocks 
could benefit from smaller tick sizes. The New York Stock 
Exchange (NYSE), NASDAQ and BATS have jointly 
petitioned the SEC to request smaller tick sizes in very liquid, 
low-priced companies.6 Market participants have suggested 
that the logical extension of this request would be allowing 
larger tick sizes for illiquid and/or high-priced stocks. 

Pros Cons 

Simple, in that it requires no input from issuers.	 Requires an optimal algorithm.7 

Enables mass customization of micromarkets. Eliminates one-size-fits-all Increases complexity, which is why some prefer to limit the tick size options to 
penny and sub-penny market structure that many believe is undermining simple increments of 1 cent, 5 cents, 10 cents, 20 cents, 50 cents and even 
capital formation and job creation. $1 increments on high-priced stocks. 

Requires no investment of time by management or management boards of	 No opportunity to educate management and boards by requiring them to 
directors in determining tick size.	 engage in a discussion with investors, stock exchanges, investment banks and 

other advisers on how choice of tick size may impact equity research coverage, 
capital commitment, liquidity and investor interest. 

Creates a variety of data for analysis that will paint an unprecedented picture
 
of how tick sizes impact market quality (e.g., volume, liquidity, volatility,
 
research coverage).
 

Will curtail speculative and high-frequency trading by adding “friction” (cost) May exacerbate high-frequency trading in already liquid stocks (mostly S&P 
to trading of small-cap stocks, thereby favoring fundamentally oriented, 500-type stocks) where the algorithm dictates sub-penny quotes (i.e., even 
long-term investors. smaller tick sizes than currently occur). 

Shifts “aftermarket support” back to Wall Street and may allow management
 
to focus more time and energy on running the business.
 

5	 For example, a stock that trades with a quoted spread of 20 cents might have a tick size of 10 cents (two increments within the natural spread). For a stock whose quoted spread is 1 cent 
    per share, the tick size might be one-half of 1 cent (two sub-penny increments). The division in two of natural spreads is based on history. In the early 1990s, when quote spreads were generally 

25 cents per share, most stocks traded in tick sizes of 12.5 cents. There were two ticks within the quoted spread, and capital formation for small businesses thrived. Academics have generally 
reported that small-cap stocks have not generally experienced a decrease in spreads, so a two-tick increment may best simulate the market-making incentives of the early 1990s, when small 
company capital formation thrived. However, further study may be needed to determine the optimal number of ticks. Trading-oriented entities should argue for smaller tick sizes (more ticks) and 
investment-oriented entities should argue for larger tick sizes (fewer ticks). 

6	 www.sec.gov/spotlight/regnms/jointnmsexemptionrequest043010.pdf. 
7	 Most 25-cent spread stocks traded in 12.5-cent tick sizes before 1998. The sub-$50 million IPO eroded with the move to 6.25 cent tick sizes. As a result, we believe that limiting the number of 

ticks per quoted spread increment (e.g., to no more than two, and possibly only one), may be required to create an adequate economic incentive to materially improve capital commitment, 
research, and sales coverage for many issuers. Therefore, the algorithm used might be as simple as this: [(average quoted spread over trailing 12 months) divided by 2 = tick size] or simply 
[(average quoted spread over trailing 12 months) = tick size]. 

The trouble with small tick sizes 3 

www.sec.gov/spotlight/regnms/jointnmsexemptionrequest043010.pdf


  

 
 

 
 
 

 
 
 
 

 
 

 
 
 

 
 
 

  

 

  

  
 

  
 

 
  

  
 

 
 

 
 

 
 

   
  
 

Pilot program: Regarding trial and implementation, the authors 
suggest a pilot program, which the SEC should establish 
to examine larger tick sizes in a significant (hundreds) and 
representative (share price, volume, market value, etc.) sample 
of stocks. It must be acknowledged that while a pilot program 
would generate valuable data on the impact on short-term 
liquidity in these stocks, it will not enable the SEC to gauge 
the magnitude of commitments that Wall Street might make 
if it were certain that the size and scope of tick size increases 
would be made permanent. For example, Wall Street cannot be 
expected to hire permanent equity research analysts, institutional 
salespeople or sales traders (capital committers) in response to 
merely a pilot program. If this proposal is implemented and 
eventually expanded to the entire marketplace, the SEC may 
want to examine the magnitude of new investments in research, 
sales, trading and capital committed after a two- or three-year 
period. The authors believe that these commitments would be 
significant. 

Finally, the authors also recommend that there be an 
associated “Issuer Bill of Rights”: 

An Issuer (Job Creators) Bill of Rights would call for public 
companies to have: 
1.	 equal standing to the trade execution community at the SEC 

on market structure matters; 
2.	 representation in the form of a standing issuer advisory 

council to the SEC that comprises issuers and issuer 
advocates; 

3.	 transparency, timeliness and completeness of ownership 
data,8 because issuers deserve real-time trading and 
ownership data of all long and short activity; 

4.	 choice in market structure that is not “one-size-fits-all”; and 
5.	 market structures that encourage fundamental investment 

strategies over trading strategies. 

The recommended solutions, which the authors call 
The JOBS Act, Part 2, would build upon the JOBS Act. They 
would give issuers and their advocates a voice in this debate 
and provide the essential fuel through economic incentives 
that our capital markets and economy need. They would favor 
long-term, fundamentally oriented investors — the foundation 
without which the stock markets would cease to function — 
over short-term traders and would help to restore confidence in 
our stock markets. 

Large investor positions are currently disclosed to the market on a delayed basis. These data do not disclose short positions and do not help issuers understand in near real-time (days) which 
investors have been transacting in their stock. The SEC should require the timely release of all issuer ownership data to the issuer, subject to insider trading restrictions, so that issuer 
managements can make more effective use of their time. 

4 The trouble with small tick sizes 

8 



   

 
 

 
 
 
 

 
 
 
 

 

 

  
 

 
 

 
 
 

 
  

  
 
 

 
 
 

 
 
 

 
  

 

  

Tribble troubles (penny tick sizes)
 

“The financial system has been wounded by a flood of so-called innovations that merely 
promote hyper-rapid trading. …Individual investors are being shortchanged.” 

Imagine a stock market in which the cost to buy and sell stocks 
is “free.” While it might appear to be shiny at first, the reality 
is that such a market would not survive. There would be no 
money to pay for research, so research would disappear. There 
would be no money to pay for salespeople, so all marketing of 
public company shares would cease. There would be no money 
to support liquidity, so institutional investors would abandon 
small companies — which are innately illiquid — in favor of 
large companies. There would be no money to pay for stock 
exchanges and alternative trading systems (ATSs). And there 
would be insufficient standing infrastructure to take companies 
public, so investor returns would evaporate. 

The stock market would collapse. 

John C. Bogle, founder of VANGUARD
 “A Mutual Fund Master, Too Worried to Rest” 

Jeff Sommer 
The New York Times 

August 11, 2012 

The reality today, however, is not far from the above fiction. 
The U.S. stock market, especially for smaller capitalization 
companies, has been in a state of progressive erosion that dates 
back to Regulation ATS and the collapse of tick sizes9 that 
culminated with decimalization in 2001 and the implementation 
of Regulation NMS (national market system) beginning in 2006. 
The stock market is in its 15th year of a slow, relentless collapse, 
where companies delist at a rate three times that at which new 
companies go public. 

Today’s stock market is nearly transaction cost-free and 
overrun by trading schemes that displace investors: Tick sizes 
are down to a penny or less, and retail commissions are down 
to $5 a trade. High-quality sell-side research has eroded, as 
talented analysts have fled Wall Street for hedge funds in what 
a former head of the Securities Industry and Financial Markets 
Association’s (SIFMA) research committee aptly called the 
“brain drain.” The median market value of companies covered by 
equity research analysts has steadily increased. There are far fewer 
investment banks acting as bookrunners on IPOs than in the 
1990s. Middle-market institutional sales desks have all been closed. 

Tick size is the minimum increment in which a stock or other security can trade. 

The trouble with small tick sizes 5 

9 



  

 
 

 
 

 
 

 
 

 

  
 

 
 

 
  

 
 

 
 

 
 

 
 

 

 
 

 

 

  
 

 
  

 

 
 

 
 

 

“The Trouble with Tribbles,” (or tick sizes in stock markets) 
is a celebrated Star Trek episode that introduced viewers to 
Tribbles. These tiny, asexual, furry animals are initially soothing 
and highly sought after — like small tick sizes are to consumer 
advocates and many micromarket economists — until they 
multiply. The prolific breeding of the Tribbles (tick sizes) 
rapidly overwhelms the Starship Enterprise (the U.S. stock 
market), consuming all of the crew’s food (revenue to support 
small brokerage firms) until, at the brink of suffocation (market 
collapse), the Tribbles (tick sizes) begin to die off. 

The trouble with U.S. stock markets is that our Tribbles 
have not died off and, until recently, have been on a more than 
decadelong breeding and feeding frenzy. Congress and the SEC 
must step in to reverse the damage by driving increases to tick 
sizes, especially in sub-$2 billion market value stocks. 

Tick sizes have multiplied from four ticks to the dollar 
(one-fourth of a point in the early 1990s) to eight ticks to the 
dollar (one-eighth of a point) to 32 ticks to the dollar (effected 
by Regulation ATS) to 100 ticks to the dollar (effected by 
decimalization) and finally to as many as 1,000 ticks to the dollar 
(effected by Regulation NMS) in dark pools and more. The 
United States suffocated support for small-cap public companies 

Many have been misled by the artful misuse of “quote” and “tick” jargon. 

•	 Tick size: The minimum increment in which a stock or other security can trade. This number is largely determined by regulators (permission) and technology 
(capability). In the early 1990s, minimum tick sizes were largely in 12.5 cent increments. Bankable spreads (see definition below), however, were frequently 
25 cents. Tick sizes were decreased to as little as 3.125 cents, after the implementation of the Order Handling Rules and Regulation ATS in 1997 and 1998. 
Tick sizes became a penny with the advent of decimalization in 2001. 

•	 Effective tick size: In a quote-driven market that either does not permit or is not dominated by electronic execution and electronic posting of limit orders, 
the effective tick size can be higher than the “stated” tick size. This was the case in the NASDAQ Stock Market in the early 1990s, and it led to a bankable 
and quoted spread (see definitions below) that was consistently higher than the stated tick size, leading to a higher effective tick size. The effective tick size in 
today’s markets is even less than the quoted tick size, as dark pools have allowed sub-penny trading and rebates within the tick. 

•	 Quoted spread: The difference between the best posted or advertised offer to buy a security and the best posted or advertised offer to sell a security. 
Referred to as the “bid-ask spread,” it is generally agreed that quoted spreads have declined since the 1990s for all but the smaller-capitalization stocks. 

•	 Effective spread: Measured as twice the difference between the midpoint of the bid-ask spread and the price paid (or received) by investors. Some claim that 
a lower effective spread necessarily indicates higher liquidity. It does not. There are other dimensions to liquidity, including 1) the dollar value of the security 
traded, 2) the time it takes to complete the trade, and 3) the slippage in price (if the midpoint of the spread moves, it undermines most measures of liquidity). 
A higher effective spread that can accommodate greater volume in a shorter period of time is more “liquid” than a lower effective spread that can accommodate 
less volume over a long period of time. Generally speaking, highly liquid stocks are made more liquid by lower tick sizes, resulting in lower effective spreads. 
However, less-liquid stocks may be made more liquid by higher tick sizes and higher “bankable spreads,” resulting in higher effective spreads. 

•	 Bankable spread: A notion that the authors use to describe how spreads are seen from the vantage point of market makers. It is the portion of a spread 
that market makers can reasonably rely upon to compensate themselves for their investment in capital, research and sales support. In today’s electronic-order 
driven market, as a rule of thumb, the bankable spread is generally equivalent to the tick size. This was not always the case. In the quote-driven market that 
existed prior to 1998, the bankable spread was equivalent to the quoted spread and was therefore at multiples that were larger than the tick size. Bankable 
spreads declined dramatically in 1998 with the implementation of Regulation ATS, undermining the role of market makers (and liquidity, especially for naturally 
less-liquid stocks). Decimalization and Regulation NMS added to the decline in bankable spreads. 

6 The trouble with small tick sizes 



   

 
 

  
 

 
 

 
 

 
 
 

  
 

 
 

 
 

 
 

 
 

 

 
 

 

           
                      
            

 

by depriving small Wall Street firms of a revenue model that 
supports capital formation by investing in fundamental research, 
salesmanship and capital support. 

Cutting the number of ticks to the dollar (i.e., increasing tick 
sizes) in sub-$2 billion market value stocks will bring life back to 
capital formation and with it, innovation, job growth and U.S. 
competitiveness. Cutting the number of ticks to the dollar in 
large-cap stocks would limit speculation, high-frequency trading 
and so-called casino capitalism, by adding economic friction 
back into the markets. In the case of large-cap, high-priced 
stocks, most stock exchanges believe that an increase in tick size 
would increase liquidity, while smaller tick sizes would increase 
liquidity still further for lower-priced, large-cap stocks. 

Prior to 1998, our stock market structure provided a 
successful framework within which many small IPOs (sub-$50 
million in proceeds) accessed U.S. capital markets. From 1991 to 
1997, there were 2,990 small IPOs, representing nearly 80% of 
all U.S. IPOs, as shown in Exhibit 1 (see page 8). Although tick 
sizes during this time frame were largely in 12.5-cent increments, 
bankable spreads were largely in 25-cent increments. For 
example, in 1991, NASDAQ stocks priced at $10 or more traded 
with a tick size, or “floor,” of 12.5 cents, while stocks priced 
below $10 traded with a tick size floor of 3.125 cents. Their 
bankable spreads, however, still were frequently 25 cents. 

Market structure characteristics 

1995 2012 
Large-cap subsidized small-cap No subsidies, small-cap fends for itself 

Retail markets stocks Retail manages portfolios 

Broad institutional sales coverage Narrow institutional sales coverage 

Profitable aftermarket (for Wall Street) Unprofitable aftermarket (for Wall Street) 

Information additive research Information mining (indexing, derivatives) 

Fundamental investing Technical and index investing 

Uncorrelated industries Increasingly correlated industries 

Quoted Electronic order driven 

Large tick sizes Small tick sizes 

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC. 

“That silent whir that you hear on the trading floors of Goldman Sachs,
 
Morgan Stanley and Credit Suisse is the post-apocalyptic sound of an oxygen-deprived,
 
computer-dominated trading floor that has been reengineered to respond to an
 
infestation of tiny ticks.”


 David Weild 
Grant Thornton LLP 

and former vice chairman of NASDAQ 

The trouble with small tick sizes 7 



  

  
 

 
 

 

 
 

 
 

Exhibit 1: The "one-two punch" of small tick sizes and the shift to electronic-order-book markets precipitated a secular decline in the 
U.S. stock markets 

Tick size changes on the NASDAQ Stock Market overlaid on the drop in the number of small IPOs 

100% 

80% 

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Quote-driven market (pre-Reg. ATS) 
Effective tick size > minimum tick size 

Electronic-order-book market (post-Reg. ATS) 
Effective tick size collapsed to minimum tick size 

A Order Handling Rules 
B Regulation ATS 
C Decimalization 
D Sarbanes-Oxley Act 
E Regulation NMS 

Transactions 
raising less than 
$50 million 

$0.30 

Transactions 
raising at least90% 
$50 million 

$0.25 

70% 

Pe
rc

en
ta

ge
 o

f t
ot

al
 U

.S
. I

PO
s $0.20 

60% 

50% 

40% N
AS

D
AQ

 ti
ck

 s
iz

es

$0.15 

$0.10 
30% 

20% 
$0.05 

10% 

0% $0.00 

A B C D E 

Bankable 
spread or 
effective tick 
size 

Tick size for 
stocks ≥ $101 

Tick size for 
stocks < $102 

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic. 
Includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs. 
11991: $0.125 for NASDAQ stocks ≥ $10; 1997: $0.0625 for NASDAQ stocks ≥ $10. 
21991: $0.03125 for NASDAQ stocks < $10. 

Compare this to the period beginning in 1998, when 
bankable spreads and tick sizes converged in the wake of 
new Order Handling Rules and Regulation ATS. The rapid 
proliferation of electronically posted orders from electronic 
communication networks (ECNs), crossing networks and other 

ATSs inexorably drove down tick sizes and bankable spreads 
to only 1 cent per share — a level that was grossly insufficient 
to sustain small company capital formation. The aftermarket 
support model that had worked so well for so long had 
collapsed, and with it, inevitably, so did small company IPOs. 

8 The trouble with small tick sizes 



   

  
 

 
 

 
 

 
 

 
 

 

 
 
 

 
 
 

 
 

 
 

 
 

 

 
 

 
 

 
 

 

  
 

 
 

 
 

 
 
 

 
 

 

 

Starting in 1997, a series of SEC-implemented regulations 
altered the economic infrastructure on which small 
companies relied: 
•	 Order Handling Rules (1997) required dealers to provide 

investors with their most competitive quotes. It laid the 
groundwork for greater competition between dealers, 
which allowed tick sizes and liquidity to narrow, with new 
regulations enacted in 1998 and 2001. 

•	 Regulation ATS (alternative trading systems) (1998) 
allowed approved electronic networks to link their securities 
and orders with registered exchanges. It exposed traditional 
trading venues like NASDAQ to fierce competition by 
driving down the volume of orders and reducing tick sizes to 
3.125 cents. 

•	 Decimalization (2001) required stocks to be quoted in 
decimals instead of fractions. Decimal quoting allowed a 
minimum tick size of 1 cent, which resulted in decreased 
liquidity in already illiquid stocks and increased algorithmic 
trading and speculative activity especially in already liquid 
stocks. Note that while decimalization is often cited as the 
source of the erosion in the U.S. equity markets, it was 
actually the combined effects of the Order Handling Rules 
and Regulation ATS that likely eroded most of the economic 
incentive to support small-cap stocks (and with it, the small 
IPO market). 

•	 Regulation NMS (national market system) (2005) 
implemented several rules to improve U.S. exchanges and 
overhaul their structures. Despite prohibiting sub-penny 

stock quotes, the SEC allowed certain exceptions for quoting 
and trade execution in these increments, such as dark pools, 
algorithmic trading or broker-dealers providing price 
improvements to a customer order. The exception became 
the rule, and many more trades were executed at sub-penny 
increments, further cementing the erosion of trading spreads 
that occurred between 1997 and 2001. 

As Exhibit 1 (see page 8) illustrates, prevailing tick sizes 
declined with the implementation of each of these rules, leading 
to the drastic drop in small company IPOs that occurred 
before Sarbanes-Oxley (SOX). The JOBS Act rolled back 
the cost of SOX 404(b) compliance for emerging growth 
companies (EGCs). However, the much bigger blight on the 
small IPO market is clearly the deterioration in tick sizes (and 
commissions), since this deterioration was concurrent with 
the drop in small IPOs. While these regulations were meant 
to reduce trading costs for investors, they have resulted in 
unintended consequences that are significant — decreasing the 
number of small-company IPOs, increasing the management 
burden of being a public company, and leaving a one-size-fits­
all U.S. stock market where only big brands and big stocks can 
sustain adequate visibility with investors. 

The trouble with small tick sizes 9 



  

 

 
 

 
 
 
 

 
 

 

	 	 	 	 	 	 	 	

 
 
 

 
	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	
 

800 

Title I, Section 106(b):
 
The hope inside the JOBS Act
 

The JOBS Act was motivated in large part by our previous 
studies that provided the first longitudinal analysis for the 
secular decline in the IPO and listed stock markets in the United 
States. Grant Thornton’s Capital Markets Series now includes 
Why are IPOs in the ICU? (2008), A wake-up call for America 
(2009), Market structure is causing the IPO crisis (2009), Market 
structure is causing the IPO crisis — and more (2010) and The 
tipping point: Is stock market structure causing more harm than 
good? (2011). 

These studies established the following: 
•	 Small (sub-$50 million) IPOs dropped dramatically in 1998 

Exhibit 2: The U.S. IPO market is broken 

with the implementation of Regulation ATS. This was the 
biggest one-event collapse in tick size in the modern history 
of U.S. stock markets, from 25 cents per share to 3.125 cents 
per share. 

•	 The small IPO market never recovered from the 
implementation of Regulation ATS. 

•	 The small IPO historically represented the lion’s share 
(nearly 80%) of the U.S. IPO market. 

•	 The dramatic drop in the small IPO market occurred four 
years before the Sarbanes-Oxley Act of 2002 — the scapegoat 
of both the IPO and public company equity listing declines. 

In the last decade, the number of IPOs has fallen dramatically, specifically deals less than $50 million in proceeds 

Price/share < $5.00 Deal size < $50 million Deal size ≥ $50 million 

N
um

be
r 

of
 U

.S
. I

PO
s 

700 

600 

500 

400 

300 

200 

100 

0 

520 average 
IPOs/year pre-bubble 

1996 1997 1998 1999 2000

128 average 
IPOs/year post-bubble 

1996 1997 1998 1999 2000 

B C D E F 

Bubble 

A Christie-Schultz study* 
B First online brokerage 
C Order Handling Rules 
D Regulation ATS 
E Online brokerage surges and stock bubble inflates; Gramm-Leach-Bliley Act 
F Regulation FD 
G Decimalization 
H Sarbanes-Oxley Act 
I Global Research Analyst Settlement 
J Regulation NMS 

539 average 
IPOs/year bubble 

1991 1992 1993 1994 1995 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

A G H I J 

Pre-bubble Post-bubble 

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic.
 
Includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.
 
*Christie, William G., and Schultz, Paul H. “Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?” Journal of Finance, Vol. 49, No. 5, 1994.
 

10 The trouble with small tick sizes
 



   

	 	 	 	 	 	 	 	 	 	 	
 
 

 
 

 
 

 

•	 There is a secular decline in IPO success rates that is 
independent of the Sarbanes-Oxley Act. Companies going 
public today are failing at increasingly higher rates as more 
deals are being withdrawn, priced below their initial filing 
range and trading below their offer price. This decline in IPO 

Exhibit 3: IPO success rates are in secular decline 

success rates has been exacerbated by the steady degradation 
in equity sales coverage of institutional and retail investors 
that is a reaction to the erosion in economic incentives from 
historically higher bankable spreads and commissions. 

Success rate of all IPOs 

50% 

100% 

70% 

60% 

80% 

90% 

40% 

20% 

30% 

10% 

0% 

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Source: Capital Markets Advisory Partners LLC.
 
Includes only corporate issuers, excluding funds, MLPs, SPACs and REITs.
 
Based on the average success rate of the last 30 filed deals, up to one year ago. A successful deal is defined as: 1) priced within one year of filing, 2) priced at or above the low end of the 

filing range, and 3) trading at or above issue price one month after pricing.
 

The trouble with small tick sizes 11 



  

		 	 	 	 	 	 	 	 	
 

 
 

 
 

 
 

 

		 	 	 	 	 	 	 	 	
 

 
 

 
 

  
 

 
 

 
 

250 

•	 As of year-end 2011, the number of publicly listed 
companies in the United States has declined 43.5% since 
the peak in 1997. The U.S. stock markets require nearly 388 
IPOs a year to replace what is delisted every year, versus the 
actual annual number of 128 IPOs per year since the dot-com 
bubble burst in 2000. If we excise the post-bubble period of 
2000 to 2003 to normalize the data, the market from 2004 
through 2011 would require 288 IPOs a year to replace what 
is delisted every year, versus the actual number of only 146 
IPOs per year. 

•	 The U.S. stock markets should be producing between 500 
and 1,000 IPOs per year. In our view, stock market structure 

modifications, beginning with the Order Handling Rules and 
Regulation ATS, have cost Americans millions of jobs (by 
depriving companies of public and private capital), depressed 
economic growth and placed a drag on investment returns 
(which track economic growth). 

The JOBS Act is an important first step to encourage small 
businesses to access U.S. capital markets, spur innovation, 
generate new jobs and revitalize the U.S. economy. It delivered 
two of the three legs of the stool required to revive the IPO 
market: 1) a framework to lower costs for small companies 
accessing the public markets, and 2) a framework to improve 

Exhibit 4: The U.S. listed markets − unlike other developed markets − have been in steady decline, with no rebound, since 1997 

In
de

xe
d 

va
lu

e 
of

 s
el

ec
te

d 
gl

ob
al

 e
xc

ha
ng

e 
lis

tin
gs

 (1
99

7 
= 

0)

(100) 
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

200 

150 

100 

50 

0 

(50) 

China 

Hong Kong 

Australia 

Deutsche Börse 
Tokyo 
Toronto 
London 

United States 

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and World Federation of Exchanges.
 
Based on the number of listed companies at year-end; excluding funds.
 
Data as of Dec. 31, 2011.
 

12 The trouble with small tick sizes
 



   

 
 
 

 
 

 
 
 

 
 
 
 

 
  

  
 

 
 

 
 

 
 

 
 

 
 
 
 
 

 
 

 
 

 
 

  
 

   
 

  
  
  
 

company communication with investors in the public and 
private markets. There is, however, a fatal flaw in the U.S. stock 
market structure that now needs to be addressed — namely, the 
third leg of the stool: the loss of the economic incentives required 
to sustain interest in small-cap stocks once they are public. 
Without adequate aftermarket incentives to support small public 
companies, the major IPO market recovery that was intended by 
the JOBS Act will not be achieved.10 Without an incentive-driven 
mechanism to support unknown and largely invisible companies 
(the vast majority of public companies) in the aftermarket for 
secondary liquidity, stock prices will languish, companies will 
continue to delist at an alarming rate, and the IPO market will 

Increased economic incentives (e.g., tick sizes) are the third leg of the stool. 

Lowered cost Improved issuer √ for issuers √ communication with 
investors 

Improve economic 
incentives to support 
especially small-cap stocks 
(increases in tick sizes) 

Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 

not recapture the shine that once led foreign markets to envy the 
U.S. stock market.11 

The JOBS Act materially improved the utility of Rule 506 
of Regulation D offerings (by removing the prohibition against 
general solicitation) and raising the upper limit of Regulation 
A offerings from $5 million to $50 million. There is additional 
work to be done, however, concerning preempting state 
regulation more broadly. The secondary market (aftermarket) 
for Regulation D private placements is still subject to state 
regulation (Blue Sky Laws), and the primary and secondary 
markets for Regulation A offerings are generally subject to state 
regulations, as well. Although the SEC published the proposed 
rule, “Eliminating the prohibition against general solicitation 
and general advertising in Rule 506 and Rule 144A offerings” 
on August 29, 2012, the rule will be open for comment for at 
least 30 days and it will be a while longer before a final rule is 
published. We are also waiting on SEC rules that will govern 
what attorneys have taken to calling “Regulation A+.” State 
regulations currently add cost and uncertainty to issuers, 
brokers and investors, and they will inhibit the full development 
of these markets if they are not addressed. Thus, through the 
application of state regulation to private markets and penny tick 
sizes in public markets, the United States lacks a fully functional 
secondary market in either the private or the public market. 

In passing the JOBS Act, Congress recognized the need for 
greater insight and analysis of U.S. market structure, specifically 

10	 Some will argue that private markets will pick up the slack, given relaxations to Regulation D offerings. However, there are no information standards of transparency and disclosure in private 
markets, and the rescission against the prohibition of general solicitation that applies to a Rule 506 private placement does not extend to the aftermarket for so-called secondary shares. 

11 	 In July 2011, one of the authors visited the London Stock Exchange and a wide array of institutional investors and market-making firms. When asked, those participants consistently cited the U.S. 
IPO market as what they once had envied about U.S. stock markets (specifically, Silicon Valley and the country’s former ability to birth entirely new, sometimes capital-intensive, industries such as 
biotechnology, semiconductors and the personal computer). Increasingly, it is apparent that foreign market professionals no longer envy our markets. Arnuk, Sal, and Saluzzi, Joe. “Killing the 
Stock Market That Laid the Golden Eggs,” Broken Hearts, July 7, 2012. 

The trouble with small tick sizes 13 

http:market.11
http:achieved.10


  

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 

 

  
 

 
 

 
 
 

  
 

 
 

 
 

 

 
  
  
  

asking the comptroller general to study the impact of state 
regulation on Regulation A, and instructing the SEC to study the 
impact of decimalization on the number of IPOs and liquidity 
for small- and mid-cap company securities.12 The JOBS Act also 
allows the SEC to set a minimum trading increment (1 cent to 10 
cents) if it determines that EGCs should be traded and quoted 
in trading spreads greater than 1 cent. While this provision of 
the JOBS Act covers only EGCs, we believe all companies, 
regardless of their market value, would clearly benefit from the 
support created by higher tick sizes. At a minimum, Congress 
should allow increased tick sizes for public companies with 
under $2 billion in market value. An optimal solution, however, 
would be for Congress to allow higher tick sizes for companies 

The degradation of support for small-cap public companies ripples through 
the private company market and likely depresses job formation in both markets. 

Small-cap public (asymmetrical order book) 

IPO (”canary in the coal mine”) 

Venture B,C, D round, etc. 

Angel l Venture A 

Large-cap public (symmetrical order book) 

Start-up: friends, family, angel 

Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 

of all market value sizes so that even large-cap companies can 
consider using it as a tool to dampen speculative trading and 
restore investor confidence. Even a company as large as Apple 
might want to discourage speculative activity and favor long-term 
investors by taking their tick size up slightly, or even making 
them smaller to encourage trading. Higher tick sizes will put 
markets more clearly back into the hands of investors and restore 
their confidence. It will also eliminate the risk of a two-tiered 
market, if the choice of tick size is available across all companies. 

Tick proliferation and quote flickering damaged 
the economy 
Tick proliferation,13 which has led to a loss of economic 
incentives to make markets, and quote flickering,14 are the flesh-
eating bacteria of the infrastructure needed to support the IPO 
market and aftermarket. 

Small ticks deprive the “on-ramps” (small investment banks) 
of the economics needed to sustain infrastructure, and these 
firms react by eating away at (cutting back on) the distribution 
needed to reach investors, the capital and capital committers 
required to support institutional liquidity, and the amount and 
quality of research coverage committed to small-cap stocks. This 
erosion of small-cap support creates a domino effect that ripples 
through the IPO, venture and start-up markets. 

Quote flickering has increasingly become a thorny 
issue with the relentless advances in technology utilized by 
high-frequency and other algorithmic traders, but it is also a 
concern with markets where high-frequency trading is less 
evident.15 As far back as 2001, in the immediate aftermath of 
the implementation of decimalization, the SEC recognized the 
potential harm that could arise from this phenomenon. 

12 JOBS Act, Title I, Section 106(b)(6)(A), “Tick Size, Study and Report.” 
13 Tick proliferation is the decrease in tick sizes. 
14 Quote flickering is measured by the rapid and repeated updates to the National Best Bid and Offer (NBBO).
 
15 Based on recent conversations one of the authors had with R. Cromwell Coulson, president, CEO and director of OTC Markets Group.
 

14 The trouble with small tick sizes 

http:evident.15
http:securities.12In a speech before the Exchequer Club on July 18, 2001, in 
Washington, D.C., Acting SEC Chairman Laura S. Unger said, 

“Rapidly changing quotes in a sub-penny 
environment could have ramifications on 
market rules limiting ‘locked’ and ‘crossed’ 
markets and trading at inferior prices. These 
various rules are dependent upon being 
able to identify the best bids and offers at 
a given point in time — a feat not easily 
accomplished when any given quote is only 
visible for a brief moment.”16 

Exhibit 5: The decline in U.S. listings 

Quote flickering has increased dramatically with the growth of 
high-frequency trading and its inherent rapid order placement 
and high cancellation rates. Despite the claims by high-frequency 
proponents that they add liquidity to the market, such transience 
in the actual best bid and offer cannot help but undermine 
consumer confidence in the quality of trade execution because 
it creates a perception of market instability in the minds of retail 
investors, even if no such instability actually exists.17 

As a result of this steady erosion in resources committed to 
capital formation and aftermarket support, the ability of U.S. 
markets to originate and support new listings is well below the 
replacement levels needed to support economic growth. The 
total number of U.S.-listed companies has shrunk every year 
since 1997 — down 43.5% through year-end 2011 — exceeding 
the number of new IPOs joining U.S. exchanges (see Exhibit 5). 

6,500 

9,000 

7,500 

7,000 

8,000 

8,500 

5,500 

6,000 

5,000 

4,500 

U.S. listings have declined by 
43.5% since their peak in 1997 

N
um

be
r 

of
 U

.S
. e

qu
ity

 li
st

in
gs

 

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and World Federation of Exchanges. 
Listings data as of Dec. 31 of each year; excluding funds. 

16 www.sec.gov/news/speech/spch509.htm. 
17 An excerpt from an April 10, 2010, letter from Chris Nagy, the head of order strategy and co-head of government relations at TD Ameritrade, to the SEC. Nagy’s comments, made in response to 

the SEC’s concept release on market structure, foreshadowed the flash crash, which occurred just one month after his letter. 

The trouble with small tick sizes 15 

www.sec.gov/news/speech/spch509.htm
http:exists.17


  

 
 

 

		  
 

 
 

 
 

 
 

 
 

		  
 

 
 

 
 

 
 
 

 
 

 

   
 

800 

600 

400 

520 average
IPOs/year pre-bubble

600

1,200

1,000

800

1,200

700

200

400

0

128 average
IPOs/year post-bubble

600

1,200

1,000

800

1,200

700

200

400

0

A Christie-Schultz study*
B First online brokerage
C Order Handling Rules
D Regulation ATS
E Online brokerage surges and stock bubble inflates; Gramm-Leach-Bliley Act
F Regulation FD
G Decimalization
H Sarbanes-Oxley Act
I Global Research Analyst Settlement
J Regulation NMS

539 average
IPOs/year bubble

While 388 new listings per year are needed to maintain a steady of small company research, marketing support and capital 
number of listed companies, the United States has averaged only (liquidity) provisions. 
128 IPOs per year since 2001 (see Exhibit 2, page 10).18 • Job loss: In today’s stock market structure, most small 

companies’ exit strategies no longer include a public listing, 
This has resulted in the following: but rather a merger or acquisition. When these companies 
• Lower growth: Efficient markets need to do more than cannot raise capital effectively through the IPO market, they 

create rock-bottom trading costs for market speculators. must look to a merger or acquisition, and jobs are lost, not 
Such nearsighted actions, while attempting to alleviate stress gained. This represents an opportunity cost of millions of 
for one constituency, have served to destroy the economics jobs and untapped economic growth. We estimate that this 
for the entire ecosystem. Markets also need to improve dearth of IPOs has cost the United States as many as 9.4 
the allocation of capital and enhance long-term economic million additional jobs that might have been created after 
growth. U.S. economic growth will continue to be inhibited companies go public. If we add the private market effect (our 
by inefficient stock pricing discovery due to the degradation best estimate of the multiplier effect in the private market 

when more companies go public), the number of additional 
jobs increases to 18.8 million (see Exhibit 6). 

Exhibit 6: A major contributor to employment 

Maximum

D
om

es
tic

 c
om

pa
ni

es
 g

oi
ng

 p
ub

lic
 in

 th
e 

U
ni

te
d 

St
at

es 1,200 +18.8 million jobs (direct plus private market effect) 
+9.4 million jobs (direct) 

+6.2 million jobs (direct plus private market effect) 

+3.1 million jobs (direct)	 

10 

additional jobs
20 (direct plus private 

market effect)*1,000 

Ad
di

tio
na

l j
ob

s 
(m

ill
io

ns
)

Maximum 
additional jobs 
(direct) 

Maximum 
additional IPOs 

Minimum 
additional jobs 
(direct plus private 
market effect)* 

15 

5 
Minimum 

200 additional jobs 
(direct) 

Minimum00 
additional IPOs 

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 
Actual number of 

*Best estimate of the multiplier effect in the private market of more companies going public. domestic IPOs 

Sources: Grant Thornton LLP, Dealogic and the U.S. Department of Commerce Bureau of Economic Analysis.
 
Domestic corporate companies going public in the United States as of Dec. 31, 2011, excluding funds, REITs and other trusts, SPACs and LPs.
 
Assumes an annual growth rate of 2.57% (U.S. real GDP growth, 1991-2011) and 822 jobs created on average post-IPO (see "Post-IPO Employment and Revenue Growth for U.S. IPOs,” 

Kauffman Foundation, May 2012).
 

18	 If we excise the post-dot-com bubble period of 2000 to 2003 to normalize the data, the market from 2004 through 2011 would require 288 IPOs a year to replace what is delisted each year 
versus the current number of only 146 IPOs per year. 

16 The trouble with small tick sizes 



   

 
 

 
 

 
 

 
 

 
 

  
 

 
 

 

 
 

 
 

  
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

   
  

  

Growing recognition that 
tick sizes must be increased 
(at least for small-cap stocks) 

An increasing number of stock market and securities industry 
experts have recently come out in favor of increasing tick 
sizes — whether for all stocks, limited to small-cap stocks, 
or by giving issuers control over their own tick sizes. This is 
a solution we favor, also backed by Professor James Angel 
of Georgetown University. See our “Recommendations and 
conclusions” (page 37). Also see Appendix A (page 41), where 
we have, with the help of Adele Hogan, drafted a bill that we 
hope will create a starting point for Congress. 

Growing recognition that some or all tick sizes must be increased 

In the table below, we summarize recent views — 
overwhelmingly in favor of increasing tick sizes — that were 
culled from a combination of 1) press accounts, 2) letters 
submitted to the SEC, and 3) congressional testimony (House 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises, June 20, 2011). 

Name Title Firm or institution Vantage point Position View 

James Angel Associate Professor Georgetown University Noted academic For Issuers, not the regulators, should decide 
what the spread should be in stocks. But if a 
company trades better with sub-penny pricing, 
then sub-penny should be permitted.19 

Larry Tabb CEO Tabb Group Noted market structure 
analyst 

For Dime spreads should not be off the table and 
[should be] considered as well. This would 
incentivize brokers to trade and provide 
research for smaller and new companies.20 

Joe Ratterman President and CEO BATS Global Markets Stock exchange For We would support an industry review of tick 
sizes and believe that in some cases the 
industry should consider quote increments 
less than a penny, and in some cases quote 
increments in nickels, dimes, or quarters 
probably makes sense as well.21 

Daniel Coleman CEO GETCO Electronic market 
maker 

For Orders, particularly retail orders, would routinely 
receive better-priced executions if the minimum 
tick size were correlated to the share price of 
the security.22 

19 D'Antona Jr., John. “Wider Spreads and Fees Could Help Restore Investor Confidence,” Traders Magazine Online News, June 1, 2012. 
20 Ibid. 
21 Ratterman, Joe. “Customer segmentation — a fundamental shift for exchanges,” FTSE Global Markets, July 23, 2012. 
22 U.S. House of Representatives, Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises hearing, Market Structure: Ensuring Orderly, Efficient, 

Innovative and Competitive Markets for Issuers and Investors, June 20, 2012. 

The trouble with small tick sizes 17 



  

  
 

 
 

 
 

 
 

 
 

 
 

   
 

 
 

 
 

 
 

 

  
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 

 
 

 

 
 
 
 

 
 

 
 

  
  
  
  
  

Growing recognition that some or all tick sizes must be increased (continued) 

Name Title Firm or institution Vantage point Position View 

Kevin Cronin Global Head of 
Equity Trading 

INVESCO, speaking on 
behalf of the Investment 
Company Institute 

Mutual fund industry For We quite clearly are supportive of trying a pilot 
program with traditional tick sizes being moved 
from a penny to 5 cents or more. We certainly 
would have all kinds of interest in being very 
involved in that process, because, at the end of 
the day, it is our investors’ money that you’re 
looking to get more engaged in this. More 
transparency, better liquidity. We think a pilot 
program would help us get to a better place 
with that.23 

Joe Gawronski President and Chief 
Operating Officer 

Rosenblatt Securities Inc. Institutional agency 
broker 

For We support experimentation by regulators and 
legislators to provide new incentives for making 
markets in the shares of smaller companies. 
The provision of the recently adopted JOBS 
Act requiring the SEC to study whether wider 
minimum price increments would improve 
market quality for emerging-growth companies 
is one example of measures that could address 
this issue.24 

Thomas Joyce Chairman and CEO Knight Capital Group Electronic market 
maker 

For We think the opportunity to widen spreads so 
that liquidity aggregates in places that people 
can more visibly see as opposed to having to 
trade in penny spreads all the time would be 
a net benefit [for small-cap companies’ capital 
formation]. If spreads widen, market makers 
might have an opportunity to have a more 
profitable business, and it might attract more 
sponsorship for more companies. I think that 
is something that is a likely outcome if spreads 
widened in an appropriate fashion…and there 
are a lot of firms that will tie research coverage 
to market making.25 

Duncan Niederauer CEO NYSE-Euronext Listed stock exchange For We think SMEs [small- and medium-sized 
enterprises] are overly burdened by some 
earlier regulations. …We would be very in favor 
of experimenting with allowing companies to 
select their own tick size. Ultimately you could 
argue that could be their decision. We’ve studied 
internally what we think it would take for us to 
implement something like that; I don’t think the 
implementation process would be long.26 

Cameron Smith President Quantlab Financial, LLC Quantitative trading For Policymakers should create categories of 
stocks with different quote increments. While 
decimalization and penny increments have saved 
investors hundreds of billions dollars, a one-size­
fits-all approach, regardless of whether a stock 
trades at $5 or $500, does not make sense. I 
tend to favor the calibrated tick size approach, 
but at the same time I also favor innovation. So, 
to the extent that one of the exchanges wants 
to experiment with having bigger tick sizes for 
some small-cap companies or up-and-coming 
companies, and wants to have a pilot [program] 
to do that, I would be supportive of that as well.27 

23 Ibid. 
24 Ibid. 
25 Ibid. 
26 Ibid. 
27 Ibid. 

18 The trouble with small tick sizes 



   

  
 

 
 
 

 
 

 
 
 
 

 
 
 

 
 

  
 

 

 
 

 
 
 

 
 

  
 

 
 

 
 

 

 
 

 
 

 
 

 
 
 
 

 
 

 
 
 

 
 

 
 

 

  
  
  
  
  

Growing recognition that some or all tick sizes must be increased (continued) 

Name Title Firm or institution Vantage point Position View 

Dan Mathisson Head of Equity Credit Suisse Securities Algorithmic trading Neutral We would have no problem with an experiment 
Trading to allow corporates to choose their own tick 

sizes. I think that it would not make a significant 
difference in the IPO markets or in the ability to 
raise capital. …I do not think it would harm the 
markets, but I don’t think it would significantly 
help either.28 

William O’Brien 

Jim Toes 

Jeffrey Solomon 

CEO 

President and CEO 

CEO 

Direct Edge 

Security Traders 
Association 

Cowen and Company 

Stock exchange 

Trade group 

Growth company 
investment bank 

For 

For 

For 

Regulation should be made more flexible to 
enhance the trading experience for smaller 
companies. An unintended consequence of 
Regulation NMS is the tendency to impose a 
“one-size-fits-all” version of market structure on 
issuers, regardless of their characteristics and 
needs. The potential widening of tick sizes can 
definitely help increase the liquidity at the bid 
and ask.29 

The unintended consequences of decimalization 
have been dramatic, most noticeably, in the 
significant decline in the quantity of liquidity 
providers in the stocks of smaller- and medium-
sized companies and those with less than active 
trading markets. [In establishing a pilot program 
to study tick size changes] we would focus on 
dollar volume traded rather than the price of the 
security or market cap, because that is the best 
indicator for how much natural customer flow 
resides in a particular stock.30 

One of the principal reasons for the lack of 
liquidity in small-cap stocks can be directly 
attributed to the advent of decimalization. 
Congress and the regulators should consider 
increasing the tick increment for emerging 
growth companies or allow companies to 
determine their own increment size.31 

By increasing the tick size for small-cap 
companies, investment banks would be 
appropriately incentivized to provide increased 
aftermarket support for these issuers by 
committing firm capital to support market-
making in these securities. Let me be clear, this 
capital commitment is not proprietary trading; 
it is merely ensuring inventory is available 
to provide liquidity to customers. Increasing 
the tick size would also make it easier for an 
investment bank to commit more resources, 
including research coverage, to smaller 
companies thereby increasing the ability of 
smaller companies to access the public equity 
markets. …By increasing the tick size, I believe 
the IPO market for smaller transactions and for 
smaller companies will re-open significantly, 
thereby providing emerging companies with 
the growth equity capital they need for the 
development of their businesses and [to] create 
more jobs here in the U.S.32 

28 Ibid. 
29 Ibid. 
30 Ibid. 
31 Ibid. 
32 Cowen and Company letter to the SEC Advisory Committee on Small and Emerging Companies, June 4, 2012. 

The trouble with small tick sizes 19 

http:either.28


  

  
 

 
 
 

  
 

 
 

 
 

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 

 

   
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 

  
  

Growing recognition that some or all tick sizes must be increased (continued) 

Name Title Firm or institution Vantage point Position View 

James Fehrenbach Managing Director Piper Jaffray Growth company For Larger minimum trading increments (“tick sizes”) 
and and Head of Equity investment bank are essential to revive support for the IPO and 
Bradford Pleimann Institutional Sales; small capitalization markets. Without higher tick 

Managing Director sizes, we believe that The JOBS Act will fail to 
and Head of Equity broadly revive the IPO market and job growth — 
Trading clear intents of Congress. The regulatory changes 

noted above — not just Decimalization but the 
changes that preceded Decimalization, created 
a U.S. equity market that is now geared to the 
trading of large capitalization stocks but has 
caused the steady erosion in aftermarket support 
(including liquidity) for small capitalization stocks. 
We believe that there is ample IPO “manufacturing 
capability” in the United States and an ample 
number of companies that could qualify to go 
public if the aftermarket support problem was 
solved through adequate economic incentives 
(increases in tick sizes). …Increases in tick sizes, 
we believe, would do more for capital formation 
and job growth than all the other provisions of The 
JOBS Act, combined. It is the “missing link” for 
firms like Piper Jaffray, which have a long tradition 
of serving the growth company marketplace.33 

Phil Johnston Partner, Head of ThinkEquity LLC Growth company For In discussions with both sides of our business, 
Equities investment bank quote increments or higher tick sizes could be 

essential to help create more investment and 
quite frankly enable the recreation of firms like 
Hambrecht & Quist, Montgomery, Robertson 
Stephens, and Alex Brown. Firms that were 
maniacally focused on supporting innovation and 
supporting small cap stocks from seed financings, 
all the way through to the IPO process and as 
small-cap public companies. …Wider quote 
increments are essential to help revive support for 
the IPO and small capitalization markets. Without 
wider quote increments and other initiatives, 
The JOBS Act will fail to broadly revive the IPO 
market and job growth. …We need to change the 
following statement, “When is the last time you 
heard about a company that wanted to go public?” 
The current environment needs to change so that 
statement can read, “We are excited to access 
the public markets” instead. Quote increments can 
be one step to encourage investment in growth 
and jobs.34 

33 Piper Jaffray letter to the SEC Advisory Committee on Small and Emerging Companies, June 8, 2012. 
34 ThinkEquity letter to the SEC Advisory Committee on Small and Emerging Companies, June 8, 2012. 

20 The trouble with small tick sizes 



   

   
  

 

 
 

 
 

 
 

 
 
 

 
 

 
 
 
 

  
	 	 	 	 	 	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	 	 	 						

	 	 	 	 	 	
	 	 	 	 	 	 	

             
	 	

	 	 	 	 	 	 	 	
	 	 	 	 	 	 	 	 	

	 	 	 	 	 	

 
 

 

 
 

 
 

 

 
	 	  

 
 

 
 

 

  
 

 
 

 

The SEC’s Report to 
Congress on Decimalization: 
Missing the forest for the trees 

According to the National Center for Children in Poverty, “Nearly 15 million 
children in the United States — 21% of all children — live in families with incomes 
below the federal poverty level — $22,350 a year for a family of four. Research shows 
that, on average, families need an income of about twice that level to cover basic 
expenses. Using this standard, 44% of children live in low-income families.”35 

The SEC’s Report to Congress on Decimalization (the SEC 
Report) acknowledges the key “transition” period of 1996–1998 
(the Manning Rule, The Order Handling Rules and Regulation 
ATS) when most of the damage was done to market incentives 
as effective tick sizes moved from 25 cents to 12.5 cents to 3.125 
cents, but it focuses on the comparatively minor transition that 
took tick sizes from 3.125 cents to 1 cent with the advent of 
decimalization in 2001 in its analysis. The SEC Report analyzes 
trees (academic studies, none of which measures the long-term 
impact of changes to market structure on capital formation and 
jobs) but needs to also consider the forest (the long-term impact 
of market structure changes on the stock market ecosystem): 
•	 The United States has 43.5% fewer listed public companies 
since the peak in 1997. 

•	 The United States is averaging a fraction of the IPOs that 
it did in the 1990s and 1980s. 

•	 Today’s stock markets contribute to unemployment, add 
to the budget deficit and indirectly contribute to 
childhood poverty. 

•	 The major structural damage occurred during the period 
leading up to decimalization (1996 to 1998), not with 
decimalization (the “coup de grâce”) in 2001. 

The SEC Report concludes: 
“The Staff believes that the Commission should solicit the views 
of investors, companies, market professionals, academics, and 
other interested parties on the broad topic of decimalization, 

how to best study its effects on IPOs, trading, and liquidity for 
small and middle capitalization companies, and what, if any, 
changes should be considered.” 

However, we believe the forest is on fire. 

Fact: The small IPO market fell off a cliff in 1997 and 1998 when 
the Order Handling Rules and Regulation ATS combined to gut 
achievable spread economics to dealers (see Exhibit 1, page 8). 
Fact: The small IPO market (traditionally more than 70% of 
IPOs) never recovered (see Exhibits 1 and 2, pages 8 and 10). 
Fact: The U.S.-listed stock markets are in a steady state of 
erosion, having lost listed companies every single year since 1997 
(see Exhibits 4 and 5, pages 12 and 15). 
Fact: More capital formation would drive entrepreneurship, 
job growth, investment returns and tax revenues (see Exhibit 6, 
page 16). 
Fact: The SEC has the authority to make changes that will 
improve capital formation, entrepreneurship, job growth and tax 
revenue.36 

A nation the size of the United States needs more than one 
stock market structure. We recommend that the SEC begin 
experimenting with multiple public market structures that 
might reasonably kick capital formation and job creation into 
high gear. There is little downside for the American people, and 
clearly there is tremendous upside if we can get it right. 

35 www.nccp.org/topics/childpoverty.html. 
36 www.sec.gov/about/whatwedo.shtml. 

The trouble with small tick sizes 21 

www.sec.gov/about/whatwedo.shtml
www.nccp.org/topics/childpoverty.html
http:revenue.36


  

 
 
 

 
 

 
 

  
 

 
 

 
 

 
 

	 	 	 	 	 	 	 	 	
   

  
 

 
 

 
 

   
 

             

   
 
 

 
 

 
 

      
	 	 	 	 	 	 	 	 	 	

 

 
 
 
 

 

 

  
 

 
 

 
 

 
 

The SEC’s empirical findings 
The empirical findings rely on short-term quantitative analysis 
by micromarket economists. This approach does not generally 
study the long-term impact of market structure changes on the 
stock market ecosystem (notably the number of bookrunning 
managers of IPOs, institutional and retail sales, the depth of 
equity research coverage and capital commitment) that may in 
the aggregate be essential to sustain a robust IPO market and 
with it, to adequately support U.S. growth. 

In this section, we quote verbatim the SEC’s nine findings 
and offer our perspective, as seasoned practitioners with an 
analytical bent, as to why we are troubled by this analysis. 

1. Spreads 
The SEC Report concludes: 
Main empirical finding of the academic literature: Both effective 
and quoted spreads declined after decimalization. However, there 
is some evidence that, at least for NASDAQ small capitalization 
stocks, the decline is not statistically significant. The effect of 
decimalization on institutional transaction costs is mixed. 

We observe: 
•	 Effective and quoted spreads are not the only relevant 

notions — a concept of bankable spread must be considered: 
–	 The SEC analysis takes the perspective of an investor 

executing a trade and not the perspective of a market 
maker committing capital. An essential concept is “what 
is the bankable spread” that market makers can rely on 
to compensate themselves for taking on risk positions 
(i.e., committing capital to the purchase or shorting of 
a stock). In an electronic market, where anyone can 
step in front of a market maker for 1 cent, that bankable 
spread is 1 cent. Contrast this to the early 1990s. 

In a quote-driven market, a market maker could quote 
at a quarter-point spread, buy at the bid, mark up to the 
ask side of the market, and earn a 25-cent spread — thus, 
the bankable spread was 25 cents. The SEC focuses 
on multiple academic definitions of spreads that are 
divorced from the reality of operating a market-making 
business that employs salespeople, commits capital and 
issues equity research opinions. 

•	 The analysis also generally ignores the period from 1996 to 
1998, when the larger changes to bankable spread and tick 
size were made. 

•	 The analysis concludes that the academic studies “…are 
contrary to the argument of…the Grant Thornton paper…that 
the spreads of small stocks declined significantly.” In fact, when 
you understand that we are focused on “bankable spread,” then 
you begin to understand that indeed, we are correct: Minimum 
tick size is the upper limit of the bankable spread. 

2. Depth 
The SEC Report concludes: 
Main empirical finding of the academic literature: Quoted depth, 
on average, declined after decimalization, but cumulative depth 
at competitive prices did not change. 

We observe: 
•	 This section focuses on the “trees” without asking the 

question “What is the impact on the forest?” We are troubled 
by this measurement of short-term effects where cumulative 
depth did not immediately change. It takes years for systems 
to adjust, jobs to be cut, and predatory computer trading 
(front-running) practices to emerge. The academic literature 
appears largely silent on the long-term impact on our markets. 

22 The trouble with small tick sizes 



   

 

 
 

	 	 	 	 	 	
	 	 	 	 	 	

 
 

 

 
 

	 	 	 	 	 	 	 	 	 	
 

 
 

 

 

 
 

 

 
 
 
 

 
 

 
 

 
 

 
  

 

 
 

 

	 	 	 	 	 	 	 	 	 	 	

3. Execution speed 
The SEC Report concludes: 
Main empirical finding of the academic literature: The total 
time to work institutional orders appears to have increased 
after decimalization. 

We observe: 
•	 We agree: Institutional liquidity has declined. 
•	 Anecdotally, institutional liquidity has declined significantly 

in small-, micro- and nano-cap stocks. This is consistent with 
the academic literature, which concludes that smaller tick 
sizes make illiquid stocks more illiquid. 

4. Trade size 
The SEC Report concludes: 
Main empirical finding of the academic literature: Trade 
sizes generally fell after decimalization, particularly for more 
liquid stocks. 

We observe: 
•	 The bigger question is “Why have trade sizes fallen?” This 

has more to do with the computerization of trading, and the 
ability of algorithmic traders and high-frequency traders to 
step in front of institutional orders. One important strategy 
has been to put large orders into computer “wood chippers,” 
scattering them about to minimize “information leakage.” 

5. Specialist/market maker participation and profitability 
The SEC Report concludes: 
Main empirical finding of the academic literature: Market maker 
participation increased after decimalization across all market 
capitalization categories, but decimalization does not appear to 
have reduced profitability. 

We observe: 
•	 This section mixes apples and oranges: It discredits the 

IPO Task Force Report and the Grant Thornton view that 
decreases in tick sizes harmed market-making profitability 
by discussing “specialist” data as opposed to “dealer” data. 
To be clear, when practitioners discuss small-cap market 
making, they are generally referring to the dealer market (i.e., 
NASDAQ pre-Regulation ATS) and not the specialist market. 

•	 Two of the authors are former senior investment bankers 
with previous experience running these businesses. We 
know from our direct experience that the Order Handling 
Rules, Regulation ATS and subsequent decreases in tick sizes 
hurt market-maker profitability. Capital commitment to 
NASDAQ market making has gone the way of the dodo bird. 

6. Market versus limit orders 
The SEC Report concludes: 
Main empirical finding of the academic literature: Decimalization 
does not seem to have reduced the use of limit orders, but it does 
appear to have decreased the size of limit orders and increased 
the frequency of cancellation. 

We observe: 
•	 This point does not appear to be relevant in resolving the 

crisis in capital formation. 

The trouble with small tick sizes 23 



  

 

 
 

 

	 	 	 	 	 	 	 	 	 	 	
 
 

 

 
 

	 	 	 	 	 	 	 	 	
 
 

 
 

 
 

  

 

 
 

	 	 	 	 	 	 	 	 	
 

  

  

  

  

  
 

 
 

 
 
 

 
 

 
  

 
 

 
 

  
  
  

7. Routing of orders 
The SEC Report concludes: 
Main empirical finding of the academic literature: Decimalization 
has not caused substantial changes to order routing practices, but 
it may have prompted traders, particularly large institutions, to 
seek more volume through floor orders. 

We observe: 
•	 This point does not appear to be relevant in resolving the 

crisis in capital formation. However, we should point out 
that order routing practices changed dramatically with the 
later implementation of Regulation NMS. 

8. Volatility 
The SEC Report concludes: 
Main empirical finding of the academic literature: Decimalization 
increased volatility in the short run but decreased volatility in the 
long run. 

We observe: 
•	 Although stock market volatility has increased over the past 

decade, even after adjusting for the credit crisis in 2008 and 
2009,37 the forest in this case is “How does the average retail 
investor feel about stock market volatility, quote flickering 
and seeing his or her orders stepped in front of for a penny?” 
Decimalization (and Regulation NMS) combined to change 
markets in ways that we believe are steadily undermining the 
confidence of the average retail investor. 

37 “Market Swings Are Becoming New Standard,” The New York Times, September 11, 2011. 
38 financialservices.house.gov/uploadedfiles/hhrg-112-ba16-wstate-kcronin-20120620.pdf. 

9. Incentives for broker promotion 
The SEC Report concludes: 
Main empirical finding of the academic literature: After 
decimalization, the reduction in relative spreads may have 
reduced broker incentives to promote stocks. 

We observe: 
•	 We agree. But we believe the SEC underestimates the 

magnitude of the loss in broker incentives, and how it has 
undermined the quality and breadth of distribution for IPOs: 
–	 Middle-market institutional sales departments that used 

to be commonplace on Wall Street have all been closed. 
–	 Institutional sales departments are increasingly dominated 

by hedge funds and large-cap-focused “mega” investors. 
–	 More institutional investors have become self-directed 

and are not effectively reached by Wall Street. 
–	 The majority of retail stockbrokers no longer market 

stocks as a major portion of their daily activity. 

We have studied all of the academic literature and, as we 
testified at the SEC Advisory Committee on Small and Emerging 
Companies, there are two effects. First, we conclude that the 
current market structure has significantly harmed both institutional 
liquidity and dealer market makers in small-cap stocks, as it has 
decimated the distribution and aftermarket support for the small 
IPO. Second, the academic literature shows that liquid stocks are 
made more liquid by smaller tick sizes and illiquid stocks are made 
more illiquid by smaller tick sizes. Thus, one must conclude that this 
market structure represents the “worst of both worlds” for small-
cap issuers: it harms institutional liquidity and dealers. 

An increasing number of market experts, including 
investors, are joining in the call to increase tick sizes. In fact, 
the Investment Company Institute, which represents over 90 
million retail investors, called for increases in tick sizes in its 
congressional testimony, made by Invesco in June 2012.38 

We hope to see more forest and fewer trees. 

24 The trouble with small tick sizes 



   

 

 
 

 
 

 
 
 
 

 
 

 

 
 

 
  

		  
 

 
 

 

 
 

  
 

 
 

 
 

 
 

 

Eating away at the “on-ramps” 
(small investment banks) 

“The irony of all this is that the change in Order Handling Rules [in 1997] that were 
instituted under my watch at the [SEC] has resulted in the proliferation of markets, 
technologies and automation that brought about the flash crash and yesterday’s [Knight 
Securities] events. I think public confidence is severely shaken by things of this kind.” 

The U.S. IPO market has suffered a significant decline, 
particularly with respect to small companies. From 1991 to 2001, 
the number of U.S. IPOs smaller than $50 million dropped 
from nearly 80% to just 20%. This decline is the unforeseen 
consequence of the regulations enacted between 1997 and 
2001 that significantly changed the stock market structure 
that paid for the infrastructure of the small-broker dealers, 
research analysts and capital support required to take small 
companies public and to support them in the aftermarket. This 
infrastructure is analogous to the system of highways — with 
roads, on-ramps, bridges, tunnels and tolls — required to 
support commerce. 

Economic infrastructure supporting U.S. capital markets 

Stakeholders:	 Economic incentives: 
•	 Roads — Trade execution •	 Tolls — Tick sizes and 

venues such as NYSE, NASDAQ, commissions that support the 
Direct Edge, Liquidnet market’s operations and upkeep 

•	 On-ramps — Investment banks 

•	 Bridges — Market makers 
(firms ready to buy/sell stocks 
continually) committing capital 

•	 Tunnels — Analyst and broker 
support to investors 

Arthur Levitt, former chairman of the SEC 
Bloomberg Surveillance with Ken Prewitt and Tom Keene 

August 2, 2012 

If tolls were cut and roads, on-ramps, bridges and tunnels 
were allowed to deteriorate, the cost to get goods to market 
would increase. Likewise, with the loss of tick sizes and 
commissions (the tolls), the stock market infrastructure has 
deteriorated, and public company management is left to pay the 
increased implicit cost of supporting liquidity in its shares — a 
burden many companies are unable to bear. Higher tick sizes 
would enable management to focus on growing the business 
instead of trying to find investor support for its publicly traded 
shares. 

Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 

The trouble with small tick sizes 25 



  

 
 

 
 

 
 

 
 

 
 

 
 

  
 

 

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

          
         

       
        

 

Tragic consequences for the cottage industry of on-ramps 
that once supported entrepreneurs 
A series of uncoordinated regulatory changes aimed at cutting 
transaction costs has led to a number of negatives — not only 
for small companies and the small broker-dealers and long-term 
investors that supported them, but also for the U.S. economy. 
Since 2001, 1-cent tick sizes no longer sustain the traditional 
market structure that helped numerous small companies issue 
IPOs. Investment banks acting as bookrunners — whose 
numbers, as of 2006, had decreased 77% to only 39 firms — 
today lose money supporting small company IPOs in the 
aftermarket. As a result, only 233 small companies issued IPOs 
between 2001 and 2007 — a 92% drop from 1991–1997 levels. 
Moreover, small company IPOs now represent only 20% of the 
total IPO market. 

Decimalization and the corresponding drop in tick sizes 
from 25 cents to 1 cent (and even sub-pennies) caused a gradual 
collapse in the infrastructure small companies need to access 
public markets, resulting in the following: 
•	 A loss of profits that paid for research, sales and trading 

support. Between 1994 and 2006, 129 investment banks, 
many of which supported small companies, exited the 
book-run IPO business — a decline of 77% over pre-1994 
levels. Because tick sizes decreased by 96%, the remaining 
investment banks dramatically cut back capital commitments 
for small company stocks, eliminating stockbrokers and 
cutting the depth and breadth of research coverage offered 
to investors. Many small companies were delisted from 
exchanges, and today, weak capital commitment from 
investment banks remains a serious impediment to small 
businesses accessing U.S. capital markets. 

•	 Market makers being replaced by high-frequency traders 
that focus on large, high-volume stocks. Only companies 
with high visibility, like Facebook and LinkedIn, whose 
brands create a demand for their shares, can survive without 
research, sales and trading support. After decimalization, 
Wall Street was forced away from serving investors in 
growth stocks and toward an increasingly narrow subset of 
very large cap-oriented and high-turnover institutions and 
hedge funds. 

Small-cap companies and capital formation 

Before 1997 After 2001 % change 
Tick sizes $0.25 per share $0.01 per share -96% 
Investment banks (acting as a bookrunner) 167 (1994) 39 (2006) -77% 
Small company IPOs 2,990 (1991–1997) 233 (2001–2007) -92% 

Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 

26 The trouble with small tick sizes 



   

 
 

 
 

 
 

 
 

 

 

  
 

 
 

 
  

 
 

 
 

  
 

 
 

 
 
 

  
 

 
 

 

 
 

  
 

 

  
 

 
 

 
 

 
 

 

 
 

               
                                
   

  

 

Eating away at IPO 
aftermarket profitability 
(support for public companies) 

Even before Regulation ATS was implemented in 1998, many 
people understood that it would gut the U.S. IPO market. 
In a letter dated February 4, 1997, addressed to NASDAQ’s 
then-president and copied to the SEC chairman, the SEC 
chief economist and the chairman of the National Association 
of Securities Dealers, Knight Securities co-founder Walter 
Raquet warned: 

“Remember you are tampering with the 
most efficient capital-raising and job-
creating mechanism in the world — the 
NASDAQ Stock Market.” 

Investment banks, like all corporations, are ultimately driven 
by simple economics. They invest and engage in profitable 
activities, while seeking to reduce participation in those activities 
that are unprofitable or insufficiently profitable to justify the 
investment and risk exposure. 

For decades, the business of marketing, executing and 
supporting IPOs of all sizes was a consistently profitable venture 
for banks. Today, in a world in which tick sizes have been 
decimalized and decimated, banks can ill afford to commit human 
and capital resources to what used to be the vast majority of IPOs 
in this country, i.e., those with proceeds less than $50 million. 

While it may be tempting for contrarians to focus on the 
gross spread of the transaction — which has remained generally 
stable at 6% to 7% of total proceeds for most IPOs — this 
position ignores the economic reality of what the destruction 
of tick sizes has wrought. In fact, the majority of an investment 
bank’s profit from an IPO once occurred after the transaction 
itself, from the trading and commissions generated by actively 
supporting the stock in the aftermarket (see Exhibit 7). 

Prior to 1998 and the implementation of Regulation ATS, 
small IPOs — those under $50 million — comprised 80% of 
all IPOs. Banks competed fiercely for this market segment 
— not just for their 7% but also for the revenue achievable in 
the aftermarket. Deals worth $25 million, which would have 

Exhibit 7: Today’s investment banks lose money supporting small IPOs in 
the aftermarket and, as a result, provide very little ‘real’ support 

IPO economics 
1997 2007 

Deal size $25,000,000 $25,000,000 

Number of managers 2 5 

Bookrunner/senior manager’s revenue 

Transaction $840,000 $560,000 

Aftermarket $1,680,000 $(56,000) 

Total revenue $2,520,000 $504,000 

Deal size needed in 2007 to achieve 
economics equivalent to 1997 

$125,000,000 

Source: Capital Markets Advisory Partners LLC. 

generated only $840,000 in gross spread dollars, became the 
generator for twice that amount in the form of aftermarket 
trading and commission revenue. 

The aftermarket revenue has all but evaporated for deals of 
this size. Today, banks routinely lose money in the aftermarket 
on small transactions. In this penny-spread, ultralow-commission 
world, there simply isn’t enough float to generate enough revenue. 

A further complication involves the number of banks that 
could be active in the stock. Before Regulation ATS, these small 
deals would typically be managed by one or two underwriters, 
which would then be the dominant traders in the aftermarket. 
Today, even small IPOs feature several banks on the cover, all of 
which are competing for the same gross spread pie, fully aware 
that there won’t be much in the aftermarket to share. Unlike the 
conditions before tick sizes eroded, banks today recognize that 
for small IPOs, the IPO itself is the only opportunity to make 
any money. 

“Investment banks are driven by simple 
economics, and the economics simply aren’t 
there anymore in the world of small IPOs.” 

Edward Kim 
Grant Thornton LLP

 and former head of product development at NASDAQ 

The trouble with small tick sizes 27 



  

 
 

 
 

 
 

 

 

 
 

 
 

 
 
 
 

 
 

 
 

  

	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	
 

 
 

Small-caps can’t create systemic risk 
(so why not build a small-cap market 
to drive growth?) 

“I think many of our problems with market liquidity in small- and mid-caps can be 
traced right back to decimalization [tick sizes],” said Dennis Dick, prop trader at Bright 
Trading in Detroit. “Where decimalization has helped to reduce spreads in the large-cap 
space, it has actually harmed liquidity in the small- and mid-cap space.”

 For blocks, “it’s nearly impossible to execute any sizable order without significant price 
impact,” Dick said. 

“SEC to Examine Tick Size for Small Caps”
 
John D’Antona Jr.
 

Traders Magazine Online News
 
April 17, 2012
 

Small public companies, defined as those with under 
$2 billion in equity market value, while very large in number 
(81% of all public companies) represent only 6.6% of total 
equity market value (see Exhibit 8, page 29). In fact, if we look 
at the progressively smaller slice of companies that are micro-
cap (less than $500 million in size), we discover that again, while 
large in number (nearly 68% of all small public companies), these 
companies represent only 1.6% of total market value. The subset 
of the market that has been hurt the most is the sub-$100 million 
market value or nano-cap companies. These issuers represent 
more than half of all public companies (52%, including the 
over-the-counter market), and yet account for only 0.33% of the 
total equity market value in our U.S. stock markets. 

What can be presumed by the small aggregate value of small 
public companies? 
•	 As a class, small public companies pose no systemic threat to 

the U.S. economy. Thus, 
•	 small public companies should have a regulatory burden that 

is cost appropriate for their size, and 
•	 higher transaction costs and incentives to support this market 

will not do significant harm to consumers and, indeed, by 
helping to drive the economic and job growth that so many 
of these companies create, will likely do consumers a great 
deal of good. 

28 The trouble with small tick sizes 



   

Exhibit 8: While 81% of all public companies are sub-$2 billion in market value… 

Percentage of total number of listed companies 

100% 

80% 

60% 

40% 

20% 

0% 

52.0% 

81.1% of listed companies 

15.6% 
12.5% 

6.4% 

13.5% 

Nano-cap Micro-cap Small-cap Mid-cap Large-cap 
(sub-$100 million) ($100 million to $500 million) ($500+ million to $2 billion) ($2+ billion to $10 billion) ($10+ billion) 

…sub-$2 billion companies represent less than 7% of total public company market value 

Percentage of total public company market value 

100% 

80% 

60% 

40% 

20% 

0% 

0.3% 

6.6% of total market value 

1.3% 

19.1% 

74.3% 

5.0% 

Nano-cap Micro-cap Small-cap Mid-cap Large-cap 
(sub-$100 million) ($100 million to $500 million) ($500+ million to $2 billion) ($2+ billion to $10 billion) ($10+ billion) 

Sources: Grant Thornton LLP and Capital IQ.
 
Includes NASDAQ, NYSE (including AMEX) and OTC listings. Corporate issuers only, excluding holding companies, funds, MLPs, SPACs, REITs and other trusts.
 

The trouble with small tick sizes 29 



  

 
 

   
 

 
 

 
 

 
 

  
 

  
 

 
 
 

 
 

 
 

  

  
 
 

 
 

 
 

 
 

  
 
 

 
 
 

 
 

 
 

 
 

 

 
  

   

The effective representation of 
corporations (the job creators) 
was destroyed 

“Taxation without representation is tyranny!”39 

The JOBS Act is a modern-day American Revolution — 
corporations lost their seat at the table in the structuring of stock 
markets, evidence mounted that stock markets were harming 
issuers (job creators), and concerned Americans raised their 
voices to the White House and Congress. Our government 
responded: a tea party ensued in the form of the JOBS Act. Like 
the Boston Tea Party, the full impact of this one will not be 
known for years. 

The fact remains that the interests of small and large 
corporations are no longer well-represented to and within the SEC 
— at least not within the Division of Trading and Markets. Why? 

Let’s start with the notion that issuers are not concerned 
with understanding market structure. It isn’t their forte. Up until 
1998, the SEC’s Division of Market Regulation (now known 
as the Division of Trading and Markets) heard mostly from the 
NYSE, NASDAQ and the American Stock Exchange (AMEX). 
Each of these stock exchanges40 was, at the time, a member-
owned organization. As part of its governance and culture, each 
of these institutions represented the interests of its constituencies 
(i.e., listed companies, investors and member firms, including 
investment banks, market makers and specialists) to the SEC and 
on Capitol Hill. 

However, with the passage of Regulation ATS, that 
exchange-led representation of issuers to the SEC was, we 
believe, largely overshadowed by the proliferation of new, 
trading-only entrants. For example, there are now 29 so-called 
dark pool trading venues, and 14 exchanges and ECNs tracked 
by the Tabb Group’s April 2012 LiquidityMatrix.41 Of the 14 
exchanges and ECNs, five trace back to the NYSE, NASDAQ 
and their owned entities. That still leaves a large plurality of 
venues whose primary interest is creating and capturing more 
trading volume (e.g., proliferation of ticks). 

To make matters worse, we would argue that the major stock 
exchanges (NASDAQ and NYSE) were forced by regulatory 
changes to abandon membership-owned, nonprofit structures 
and convert to for-profit stock-based ownership — NASDAQ in 
2000 by Regulation ATS and the NYSE in 2005 (reverse merger 
with Archipelago) by Regulation NMS. Thus began the modern 
era in which member firms opened dark pools to compete for 
trading volume against the listed exchanges, and new trading-only 
venues emerged that offered no listing benefits for issuers. While 
the NYSE and NASDAQ try their best to represent issuers, it 
is a common tactic for the nonlisted trading venues and high-
frequency trading firms to portray, with the SEC and Congress, 
the exchanges’ efforts as self-serving. From where we sit, this 
marginalization and underrepresentation of corporate issuers is a 
construct that the United States can ill afford. 

39 The quote is commonly attributed to Massachusetts lawyer and political activist James Otis, Jr. c. 1761. 
40 NASDAQ was not technically granted “exchange” status by the SEC until 2006. While NASDAQ was generally thought of by the public as a stock exchange, the term legally requires status 

as a self-regulatory organization. 
41 www.tabbgroup.com/Page.aspx?MenuID=47&ParentMenuID=2&PageID=46. 

30 The trouble with small tick sizes 

www.tabbgroup.com/Page.aspx?MenuID=47&ParentMenuID=2&PageID=46
http:LiquidityMatrix.41


   

  

 
 

 
 
 

 

 
 

 
 

 

	 	
	

	
	

	
	
	 	

    

	

	
	 	
	
	 	

	
	 	
	

	 	 	 	
	 	 	

	
	 	

Investors now face U.S. capital markets that are more 
complex, opaque and volatile than ever before. 
•	 Greater complexity and volatility that undermine investor 

confidence: The U.S. stock markets were once dominated by 
three stock exchanges (NYSE, NASDAQ and AMEX) that 
focused on investing and capital formation. The markets are 
now fragmented across 60 different venues focused primarily 
on trading. 

•	 Increase in high-frequency trading: Lower tick sizes have 
led to increased market speculation, dark pools and high-
frequency trading — from approximately 10% of daily 
U.S. trading in 2000 to more than 60% today. Rather than 
supporting long-term company growth by bringing research, 
sales and capital to investors, high-frequency traders seek 
to make a quick profit by identifying short-term price 
discrepancies. 

Winners Losers 

•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 

Speculators 
Big investment banks 
Hedge funds 
Day traders 
Electronic trading 
Volatility 
Trading-oriented institutions 
Dark pools 
Big company acquirers 
Asia 

•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 
•	 

Small companies 
Entrepreneurs 
Private enterprise 
Small investment banks 
Venture capital 
Market makers 
Stockbrokers (advice) 
New issue distribution 
Equity research 
IPOs 

•	 
•	 
•	 
•	 

Institutional liquidity in small-cap stocks 
Transparency in small-cap stocks 
Long-term investors 
The United States 

The trouble with small tick sizes 31 



  

 
 

 

 
 

	 	 	 	 	 	 	 	
 

 

	 	 	 	 	 	 	 	
 

	 	 	 	 	 	 	
 

	 	 	 	 	 	 	 	 	

 
 

 
 

 
 
 

 
 

 
 

 

 
 

 
 

  
 

 
 

 
 

 
 
 

 
 

  
 

 
 
 

 
 
 

 

 
 

Why some large investment banks, 
large investors and stock exchanges 
fight for smaller tick sizes, despite 
their negative impact on the economy 
Some large investment banks: Most large investment banks 
derive significant revenue from some combination of businesses 
that benefit from smaller tick sizes. These are likely to include: 
•	 dark pools (internalization trading markets that depend on 

sub-penny executions and rebates that further cut effective 
tick sizes below their regulated minimum quote level of one 
penny per share), 

•	 algorithmic trade execution (described by some as an 
“electronic wood chipper” that takes block orders of 100,000 
shares or more and cuts them into 100-share increments), 

•	 sponsored access (where high-frequency or other aggressive 
trading customers use the investment banks’ pipes to directly 
access the stock market for faster trade executions), and 

•	 prime brokerages (where money is lent mostly to hedge 
funds to short — and sometimes acquire — securities). 

Some large investors: One of the authors has been in meetings 
with the senior management of large investment firms where 
they have confided that, because they have the scale to 
employ their own research analyst staffs, lower tick sizes and 
commissions benefit them competitively by depriving their 
smaller competitors of shared services from the Wall Street 
firms. As a result, they will tolerate higher volatility in and 
erosion of the overall market and economy because they believe 
that they have a competitive advantage in these increasingly 
opaque markets. In addition, major index, exchange-traded fund 
and basket trading shops unquestionably benefit from lower 
execution costs, especially since they do not require equity 
research or sales services in the traditional sense. 

Some stock exchanges: When many of your customers are high-
frequency traders that depend on smaller tick sizes, it is difficult 
to take a broader market position against penny tick sizes 
without harming your revenue. For this reason, the listed stock 
exchanges are in a precarious position. 

The vast majority of high-frequency trading is confined 
to large- and mid-capped stocks. It is for this reason that we 
think it should be easy for Congress, the SEC, stock exchanges, 
investment banks and perhaps even the high-frequency trading 
community to reach an accommodation in the small-cap 
segment. As mentioned in a previous section, while this sub-$2 
billion public company sector represents over 80% of public 
companies, it comprises less than 7% of total market value. 
This was the rationale behind The Wall Street Journal op-ed 
published on October 27, 2011, titled “How to Revive Small-
Cap IPOs: A new, parallel market can provide the critical 
support companies under $2 billion in value need to go public.”42 

One concern expressed by entrepreneurs about listing 
their company on a newly formed stock market is the fear of 
being stigmatized if they choose a new, unbranded market. For 
this reason, any new market would be better accepted under 
the umbrella of one of the major listed brands (e.g., NYSE or 
NASDAQ) than it would if it were to go it alone. Alternatively, 
if all companies were given a choice over their own tick sizes 
(or an algorithmic way of determining optimal tick sizes was 
instituted), there would be no risk of “stigma,” and there could 
be one market with one regime of mass customization. 

42 online.wsj.com/article/SB10001424052970203554104577001522344390902.html. 

32 The trouble with small tick sizes 



   

 

 
	 	 	 	 	 	 	 	 	 	 	

 
 

 
 

 
 

 

  
 

 

 
 

 
 

  
 

 
 

 
 

  
 

 
 
 

 
 

  
 

 
 

 
 
 
 
 

 
 

 
 
 

  

 
 

 
 

 
 
 
 

  
 

  
  

 
 

Beware of the hidden agendas of 
those who champion smaller tick sizes 

As a result of our past studies (e.g., Why are IPOs in the ICU? 
A wake-up call for America, Market structure is causing the IPO 
crisis — and more), we are continually engaged in discussions 
with current and former regulators, securities attorneys, 
politicians, economists and industry executives. We have learned 
much from these discussions, including that there may be 
hidden agendas for pushing for smaller tick sizes when it seems 
that the evidence is in: small tick sizes, applied to all stocks, are 
undermining U.S. markets and with them, capital formation, job 
growth and the U.S. economy. 

The following is a list of arguments and hidden agendas that 
may help to explain why some people will argue that smaller tick 
sizes enhance liquidity for small-cap stocks (the stock market 
version of “black is white”): 
•	 To eliminate sales: Smaller tick sizes eliminate the incentive 

for stockbrokers to market stocks to investors. By 
eliminating sales incentives, some hope to eliminate sales 
practice abuses. 
The hidden agenda: To eliminate sales practice abuses (we 
believe, however, that vigilant enforcement is the proper way 
to address these abuses). 

•	 To eliminate small public companies: Smaller tick sizes 
make it difficult for small companies to go public. Because 
small companies fail at higher rates than large companies, 
investors are protected from these failures. 
The hidden agenda: To keep small companies from 
going public. 

•	 To be right: Some market participants are likely to resist 
admitting that well-intended market structure changes 
such as the Order Handling Rules in 1997, Regulation 
ATS in 1998 and Decimalization in 2001 might have had a 
catastrophic impact on the U.S. economy. 

The hidden agenda: No one likes to admit that he or she was 
wrong. It takes courage to stand up and correct past mistakes. 
However, we are hopeful that those who are in a position 
to advocate for these rule changes will follow the example 
of some, including former chairman and CEO of Citigroup 
Sandy Weill (on the repeal of Glass-Steagall) and former SEC 
Chairman Arthur Levitt (on the unintended consequences of 
the Order Handling Rules), and begin the process of bringing 
our IPO market back to its former level — one that made the 
United States the envy of stock markets throughout the world. 

•	 To serve special interests: Many market participants benefit 
from smaller tick sizes, which proliferate the number of 
price points in which stocks trade, thereby increasing trading 
complexity and large-cap volume, and increasing their 
potential to profit even at the expense of the economy. 
The hidden agenda: Special interests lobby to change market 
structure in ways that will increase their profits. 

•	 To “protect” consumers: Some market participants blindly 
support the merits of low-cost trading, not appreciating the 
harm that is actually inflicted upon investors. The march 
toward ever-lower costs has, in fact, deprived the markets of 
adequate economic incentives to support capital formation 
and economic growth. This, in turn, undermines consumers 
by eroding investment returns, job growth and tax revenues 
required to sustain public services (e.g., education, sanitation, 
and fire and police protection). 

The good news is that more and more people are coming 
around to the view that small tick sizes are making a wasting 
asset of the U.S. stock markets. 

We believe that it is only a matter of time before reason 
prevails and market structure enhancements are implemented 
to reverse the more than decade-long decline in primary capital 
formation. 

The trouble with small tick sizes 33 



  

 

 
 
  

 

 

 
 

 
  

  
 

 
 

 
 

 
 
 

 
 

 

  
 

 
 

 
 

 
 

 
 

 
 
 

 
 

 
  

  
 

 
 
 

 
  

  
 

 
 

 
 

 
 

  
   

 

Tick sizes: The academic perspective 
and international practices 

Academic approaches offer hints, but fall short 
Micromarket economists tend to focus on changes in liquidity 
(or other metrics) around specific events over relatively short, 
measurable time frames. Yet, as Professor Robert Schwartz43 

pointed out at his annual Financial Markets Conference in 
New York: 

“Markets are still adjusting to regulatory 
changes like the Order Handling Rules 
and Regulation ATS that were made over a 
decade ago.” 

While most of the public sees the stock market as simply the 
NYSE and NASDAQ, in fact, the stock market is defined by the 
totality of market participants — brokerage firms, institutional 
and retail investors, large and small investment banks, sell- and 
buy-side research analysts, traders and trading venues — without 
which markets cannot function. This is what we refer to as 
the stock market ecosystem, and we believe that only from an 
examination of the long-term decline in the ecosystem, coupled 
with a qualitative analysis of how short-term measurable effects 
from micromarket structure changes could have led to this 
decline, can legislators and regulators fully understand how the 
proliferation of ticks (decrease in tick sizes) could have eroded 
primary capital formation, economic growth and job formation. 

In the 1980s and 1990s, it was generally accepted and 
appreciated by stock exchange officials at NASDAQ and the 
NYSE that large-cap stocks would subsidize the research, 
sales and trading support required by smaller-cap stocks in the 
interests of capital formation and economic growth.44 In fact, the 
NYSE went as far as to allocate small-cap stocks to the specialist 
booths of firms making markets in large-cap stocks. The quid 
pro quo for permitting these specialist firms to earn excess 
profits on large-cap stocks was the expectation that they would 
subsidize small-cap stocks. It was also understood that large-cap 
stocks and higher spreads would create flows to broker-dealers 
that would allow them to carry the standing infrastructure of 
salespeople, research analysts and traders needed to subsidize 
small-cap liquidity between “IPO windows.” Thus, the cash 
equities business was seen as a break-even business until the IPO 
window would open and generate profits and bonuses for Wall 
Street personnel. 

The higher profits derived from higher tick sizes and bankable 
spreads created a profit opportunity that incentivized Wall Street 
firms to maintain larger sales forces that would cover more 
institutional and retail investors. This larger sales and marketing 
capability supported volumes of high-touch sales calls to a broad 
range of investors that educated investors and created recognition, 
appreciation and a market for less well-known stocks. 

So, what happened? We believe that the NYSE had a viable 
model in the form of large-cap stocks subsidizing small-cap 
liquidity, and NASDAQ had a viable model in the form of large 
tick sizes and trading spreads enjoyed by the dealer community 
that enabled enough profitable aftermarket trading for dealers 
to cause them to steer IPOs in NASDAQ’s direction. The 
AMEX, however, did not have a viable model to adequately 
subsidize and support small-cap companies in the aftermarket. 

43 Baruch College’s Marvin M. Speiser Professor of Finance and University Distinguished Professor of Finance at the Zicklin School of Business. 
44	 Conversations, over the past two years, between David Weild and Richard Grasso, former chairman and CEO of the NYSE, and Richard Bernard, former general counsel for the NYSE and 

a member of the International Stock Exchange Executives Emeriti (ISEEE). 

34 The trouble with small tick sizes 

http:growth.44Today, in the wake of decreasing tick sizes, these subsidies have 
been eliminated, which has caused a wholesale decline in this 
standing infrastructure. The decline in the IPO market is directly 
attributable to the decline in the standing infrastructure including 
sales, research, capital commitments and smaller investment banks. 

Section 106(b) of the JOBS Act asks a long-term question: 
How did the “transition to trading and quoting securities in 
one-penny increments, also known as decimalization...impact... 
the number of initial public offerings since its implementation 
relative to the period before its implementation?” A firm 
answer to this question appears to be beyond the purview of 
micromarket economics, which seems focused on analyzing 
the impact of a structural change to market structure over 
short periods of time on stock trading, and not considering 
the cumulative effect of multiple changes on the broader stock 
market ecosystem that include a wide variety of changing 
participants from research analysts and salespeople to traders. 

We liken the increasing recognition that the proliferation of 
ticks undermines markets broadly to the revelation that tobacco, 
which for hundreds of years was thought to be a cure-all,45 

causes cancer. 

Inconclusive benefits and unintended consequences 
Academic research conducted on the impact of tick size 
reductions on different global markets has generally concluded 
that large companies — which tend to be very liquid, have 
recognized brand names and trade at higher prices — are helped 
by decreases in tick sizes. Tick size reductions for these types 
of companies have improved their market quality by tightening 
spreads and attracting new market participants, therefore 
benefiting investors by lowering transaction costs and increasing 
the number of liquidity providers.46 

These benefits diminish or disappear altogether, however, for 
smaller, less-liquid companies. Decreased tick sizes and spreads 
have decimated return potential and increased risk exposure for 
market makers, which now lack economic incentives to support 
these small-cap stocks and have generally reacted by cutting the 
resources that once supplied this support. 

While continually decreasing tick sizes has arguably benefited 
large-cap investors in the short-term — due to improved bid-
ask spreads at the expense of small-cap companies and market 
makers — its overall impact on capital formation and economic 
health is largely unstudied and therefore, unknown. There is also 
significant debate regarding what constitutes the optimal tick size 
that will benefit all market participants, with academic research 
suggesting that it is improbable that an ever-diminishing, one­
size-fits-all approach will be beneficial to companies of all sizes. 
If tick sizes continue to decrease, the technological demands on 
the trading infrastructures and data systems of all markets will 
continue to proliferate as the number of quotable increments 
expands exponentially, trading becomes riskier and complexity 
intensifies — all at no gain to investors or public companies, and 
possibly to the detriment of the global economy. 

45 academic.udayton.edu/health/syllabi/tobacco/history.htm#begin. 
46 This finding is repudiated by other academic studies, however, that find that new market participants in the form of unconstrained high-frequency, algorithmic traders actually decrease liquidity and 

increase trading costs and stock price volatility. 

The trouble with small tick sizes 35 

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Variations in international tick size rules 
Broadly speaking, worldwide tick size standards are classified 
as either static or dynamic. A static tick size regimen is based 
on a single fixed value that applies to all quotes in a security, 
regardless of its stock price, market float or any other size or 
liquidity measurement. The United States is one example of a 
static regimen. 

In contrast, a dynamic tick size schedule allows the price 
increment to vary by moving it up or down along a sliding scale 
depending on a range of values — typically price per share, as it 
is easily measured. As market participants enter quotes into an 
order book, each price is assessed against an approved tick size 
matrix to determine the appropriate increment. Countries that 
employ dynamic tick size regimens have overwhelmingly chosen 
to base them solely as a function of a share price’s variation, 
which, like static regimens, fails to adequately account for a 
company’s market float, liquidity and trading volume, among 
other characteristics. Effective tick size regimens should optimally 
be customized to the characteristics of each public company, 
and computer technology is now at the point where mass 
customization of tick sizes could be cost-effectively achieved. 

Whether countries choose to employ static or dynamic tick 
size standards, the relative tick size47 under both regimens is now 
almost always universally small — typically occurring between 
five and 10 basis points,48 regardless of a company’s share price 
(see Appendix C: Tick size standards around the world, page 52). 

The race to the bottom 
Despite a recognized need to harmonize tick size standards 
across trading venues, competitive pressures have led most global 
stock markets to carry out significant decreases in tick sizes in 
recent years. Plagued by a proliferation of entrants, including 
alternative trading platforms and market participants employing 
ultrafast algorithmic trading practices, many exchanges have 
been forced to add granularity and reduce their pricing grids in 
order to defend their territory (and profits). 

While all of this activity may improve an exchange’s 
competitive position by driving increased trading volume, the 
academic research seems to suggest that it is happening at the 
detriment of other market participants, most notably small, less-
liquid companies. 

The literature shows that smaller tick sizes hurt liquidity for illiquid stocks: 
•	 Illiquid stocks are harmed by smaller tick sizes. 
•	 Liquid stocks are helped by smaller tick sizes. 

But, not so fast! What are the long-term effects of smaller tick sizes on the
 
ecosystem?
 

Answer: They degrade stock market infrastructure and capital formation, and 
undermine the economy. 

47 Based on tick size as a percentage of price per share.
 
48 Based on the minimum and maximum relative tick size statistical mode.
 

36 The trouble with small tick sizes 



   

 
 

 
 

 
 

 
 

 
 

	 	 	
	

	 	
	

 
 

 

 
 

 

  
 
 

 
 

 
 

 
 

  
 

 
 
 

	 	 	 	 	 	 	
	 	 	 	 	 	 	

	 	 	
	 	

   
 

Recommendations and conclusions
 

“Larry Tabb, chief executive of the Tabb Group, said dime spreads shouldn’t be off the 
table and [should be] considered as well. This, he added, would incentivize brokers to trade 
and provide research for smaller and new companies. 

“[Professor James] Angel believes issuers, not the regulators, should decide what the 
spread should be in stocks. But if a company trades better with sub-penny pricing, ‘then 
sub-penny should be permitted.’” 

The JOBS Act, Part 2 (issuer choice) — make stock markets 
work for issuers (employers) again 
SEC-driven regulatory changes beginning back in 1996 ushered 
in an age of intense competition and innovation for investor (and 
trader) order flow in public equities. However, as a result of 
Regulation NMS, which permitted all trading venues to compete 
for trading in all listed securities, issuers were deprived of their 
only choice in market structure as it impacted their shares, i.e., 
the dealer versus specialist system. Today, it does not matter 
whether issuers list on the NYSE, NASDAQ or the NYSE 
AMEX (and in the future, BATS and Direct Edge), because they 
have no control over how their stock is traded and, in turn, no 
ability to significantly influence the level of: 
•	 speculative versus investment activity, 
•	 research coverage, 
•	 sales support, or 
•	 capital commitment. 

“Wider Spreads and Fees Could Help Restore Investor Confidence”
 
John D’Antona Jr.
 

Traders Magazine Online News
 
June 1, 2012
 

We propose a very simple change to empower the boards of 
directors of public companies to optimize the market for their 
shares by giving them the authority to establish the tick size in 
the trading of their stock by a simple majority vote of their board 
of directors. 

The current penny-or-less tick size has created near-
frictionless trading that induces speculative trading in large-cap 
stocks and removes the economic incentive for traders to provide 
liquidity, and for research analysts and brokers to create order 
flow in small- and micro-cap stocks. 

If issuers of all market value sizes were able to choose a tick 
size from a range that is no less than one penny and no more than 
5% of their share price, they would be able to customize their 
tick size in a way that they determined was in the best interests of 
the market for their shares.49 This would allow issuers to optimize 
their access to capital, support and volatility by: 
•	 providing adequate incentives for equity research coverage, 
•	 providing adequate incentives for capital commitment and 

market making, 
•	 encouraging investment activity, and 
•	 discouraging speculative activity. 

49 The SEC will also need to control rebates and executions within the spread in order to keep volume from migrating to dark pools and to prevent siphoning off of revenue intended to fund the value 
components of research, sales support and capital commitment. 

The trouble with small tick sizes 37 

http:shares.49


  

  
 

 

  
 

 
 

 
 

 
 

 
  

 
 

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

  
 
 
 

 

  
 

 
 

 
 

 
 

 
 

  

	 	 	 	 	 	 	 	 	 	
 

	 	 	 	 	 	 	 	 	

A healthy discussion would be entered into by the issuer, 
investment banks, market makers and investors to determine 
what the optimal market structure, as defined by tick size, might 
be — is it 1 cent, 5 cents, 10 cents, 20 cents, $1 or something else? 

“Issuer choice” tick size implementation table 

Stock price per share Tick size range Relative tick size range* 
< 1.00 0.0001 to 0.049995 0.01% to 5% 
1.00 to 4.99 0.01 to 0.2495 0.2% to 5% 
5.00 to 9.99 0.01 to 0.4995 0.1% to 5% 
10.00 to 49.99 0.01 to 2.4995 0.02% to 5% 
50.00 to 99.99 0.01 to 4.9995 0.01% to 5% 
≥ 100.00 ≥ 0.01 ≤ 5% 

*Tick size as a percentage of price per share.
 
Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC.
 

Alternatively, policymakers could automate the mass 
customization of tick sizes via an algorithm that establishes 
increments at one-half of the average quoted spread of a stock 
over some defined period of time, e.g., trailing 12 months. 
Stock exchanges increasingly acknowledge that today’s market 
structure is effective only for a small minority of innately liquid, 
mostly large-cap stocks, and that higher-priced and less-liquid 
stocks could benefit from higher tick sizes, while lower-priced 
and extremely liquid stocks could benefit from smaller tick sizes. 

For example, a stock that trades with a quoted spread of 20 
cents might have a tick size of 10 cents (two increments within 
the natural spread). For a stock whose quoted spread is 1 cent 
per share, the tick size might be one-half of 1 cent (two sub-
penny increments). The division in two of natural spreads is 
based on history. In the early 1990s, when quote spreads were 
generally 25 cents per share, most stocks traded in tick sizes 
of 12.5 cents. There were two ticks within the quoted spread, 
and capital formation for small businesses thrived. Academics 

have generally reported that small-cap stocks have not generally 
experienced a decrease in spreads, so a two-tick increment may 
best simulate the market-making incentives of the early 1990s, 
when small company capital formation thrived. However, 
further study may be needed to determine the optimal number 
of ticks. Trading-oriented entities should argue for smaller 
tick sizes (more ticks) and investment-oriented entities should 
argue for larger tick sizes (fewer ticks) including only one tick 
equivalent to the natural quoted spread. The NYSE, NASDAQ 
and BATS have jointly petitioned the SEC to request smaller 
ticks in very liquid, low-priced companies. Market participants 
have suggested that the logical extension of this request would be 
allowing larger tick sizes for illiquid and/or high-priced stocks. 

These two recommended alternative solutions may be used 
individually or in combination. In the instance where the issuer 
choice alternative is used, for issuers that have not affirmatively 
made a choice in tick size, there might be a default option. That 
default option could be fulfilled by algorithmic customization of 
the issuer’s tick size. 

Congress can require the SEC to implement such systems 
across all trading venues, or the SEC could simply enact its 
own rule. Because these changes necessitate only a simple 
programming change, these capabilities could be implemented 
very quickly and cost-effectively by all trading venues. The 
SEC could appoint a central administrator (e.g., the SEC, the 
DTCC or FINRA) of tick sizes, which would then be published 
to the market. These improvements in market structure would 
also allow the retention of current major trading regulations 
including the Manning Rule, the Order Handling Rules, 
Regulation ATS and Regulation NMS. 

When tick sizes are increased, the SEC and Congress must 
ensure that: 
•	 trading cannot be moved offshore to quote within the tick 

size and, therefore, doing offshore what you cannot do in the 
United States; and 

•	 rebates and other sharing arrangements do not make a 
mockery of the incentives intended by increases in tick sizes. 

38 The trouble with small tick sizes 



   

  
 

 

	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	

	 	 	
	 	
	 	 	 	 	 	 	 	

 
 

	 	 	 	 	

	 	
	 	 	 	 	

 
 
 

  

	 	 	 	 	
	 	 	 	 	 	 	

	 	 	 	 	 	 	 			

	 	 	 	 	 	 	 	 	
 

	 	
	
	 	
	 	
	 	

	 	
	 	 	 	 	 	 	

	 	
	 	
	 	 	 	 	 	

	 	
	 	
	 	
	 	 	
	 	 	
	 	
	 	

	 	
	
	 	
	 	 	
	 	 	
	 	
	 	

We prefer, for market confidence reasons, a simple structure 
where everyone — institutional and retail — pays the same tick 
increment. 

Broad benefits 
We believe there would be broad benefits for the U.S. economy 
because an issuer-selected tick size regimen would: 
•	 be supportive of job creators (issuers) by giving them a voice 

and a seat at the table; 
•	 be likely to induce growth in the ecosystem to support small 

companies, IPOs, investments and job growth; 
•	 be simple to implement; 
•	 be highly cost-effective; 
•	 usher in a healthy discussion among issuers, investment 

banks, research analysts and investors as to what constitutes 
an optimal market structure for different types of public 
companies; 

•	 create choice for issuers and investors; 

•	 dampen volatility; and 
•	 promote investment activity over speculative activity. 

Trial and implementation 
The JOBS Act requirement for the SEC to study the impact 
of decimalization on U.S. capital markets is an important first 
step in opening the dialogue regarding small company market 
structure concerns. 

We urge the SEC to also consider how public companies of 
all sizes would benefit from higher tick sizes, which will: 
•	 expand research, sales and trading support; 
•	 raise the visibility of less-liquid companies, thereby 

expanding investors’ pool of opportunities; 
•	 favor investors and stock pickers over short-term traders 

and indexers; and 
•	 increase investor confidence by reducing the number of price 

points at which stocks are traded and by limiting computer 
trading behaviors. 

Larger tick sizes will improve investor confidence, capital formation and job growth 

Large-cap stocks (naturally liquid) Small- and micro-cap stocks (naturally illiquid) 

Sm
al

le
r 

tic
k 

si
ze

s •	 Cut order depth 
•	 Increase liquidity 
•	 Increase stepping ahead/gaming 
•	 Increase quote flickering 
•	 Undermine investor confidence 

•	 Decrease order depth 
•	 Decrease (hurt) liquidity 
•	 Increase stepping ahead/gaming 
•	 Discourage marketing (sales) support 
•	 Discourage active research support 
•	 Discourage capital commitment 
•	 Undermine investor confidence 

La
rg

er
 ti

ck
 s

iz
es

•	 Increase order depth 
•	 Decrease liquidity (but stocks are still extremely liquid) 
•	 Limit stepping ahead/gaming 
•	 Decrease quote flickering 
•	 Improve investor confidence (market seems more transparent) 

•	 Increase order depth 
•	 Increase liquidity 
•	 Discourage stepping ahead/gaming 
•	 Encourage marketing (sales) support 
•	 Encourage active research support 
•	 Incentivize capital commitment 
•	 Improve investor confidence 

Sources: Grant Thornton LLP and Capital Markets Advisory Partners LLC. 

The trouble with small tick sizes 39 



  

  
 

 
 

 
 
 
 

  
 

 
 

 
 

 
  

 
 

 
 

 
 

 
 

 
 

 
 

  
 

 
 

 
 

 
 

 
 

 
 

 
 

 

  
 

 
 

 
 

 
 

 
 

 
 

 

  

  

  
  

 
  

The SEC should initiate a pilot program to let companies 
of all sizes choose their own tick size, following parameters 
determined by the SEC. This program would examine larger 
tick sizes in a significant (hundreds) and representative (share 
price, volume, market value, etc.) sample of stocks. Managements 
and their boards must become engaged in the market structure 
debate so that they can understand the linkage between market 
structure and its impact on their shareholders. What better way 
to do this than to give issuers control over their own tick size? 

During the pilot program, the SEC would also be able to 
gather valuable research and data to inform the debate on how 
to best structure the U.S. capital markets to support capital 
formation and job growth. The SEC could then evaluate the 
impact of different tick sizes on 1) the pricing and trading patterns 
of companies with different liquidity profiles, and 2) how these 
patterns vary across specific industries and company sizes. 

It must be acknowledged that while a pilot program would 
generate valuable data on the impact on short-term liquidity in 
these stocks, it will not enable the SEC to gauge the magnitude 
of commitments that Wall Street might make if it were certain 
that the size and scope of tick size increases would be made 
permanent. For example, Wall Street cannot be expected to hire 
permanent equity research analysts, institutional salespeople 
or sales traders (capital committers) in response to merely 
a pilot program. If this proposal is implemented and eventually 
expanded to the entire marketplace, the SEC may want to 
examine the magnitude of new investments in research, sales, 
trading and capital committed after a two- or three-year 
period. The authors believe that these commitments would be 
significant. 

These, among other areas of study, would build upon the 
JOBS Act and help define optimum tick sizes to keep costs low 
for investors and attract the necessary infrastructure support. 
Market forces would then become the determinant of tick sizes, 
rather than the arbitrary ruling of one-size-fits-all sub-penny 
increments. The fallacy of “What is good for Exxon Mobil is 

good for issuers of all sizes” — which has served as a foundation 
for far-reaching and destructive rulemaking — has clearly failed 
the U.S. economy. 

Create an Issuer (Job Creators) Bill of Rights 
It is clear that market structure has become increasingly hostile 
to issuers. Issuers complain that stocks are increasingly correlated 
and do not appear to trade on their fundamentals; stock market 
volatility has increased; management is required to dedicate an 
increasing and sometimes alarming percentage of time to investor 
relations (IR); and who trades (long and short) in its securities is 
so opaque management is prevented from being able to prioritize 
and allocate its time effectively. 

We believe it is essential for issuers and their advocates to 
have a voice in this debate. The following “Issuer Bill of Rights” 
was compiled from a group of panelists at the annual National 
Investor Relations Institute conference on June 4, 2012, in 
Seattle, Wash., and overwhelmingly approved in a show of hands 
by more than 200 mostly IR professionals representing large 
and small public companies. The panel, titled “IR Targeting 
& Investor Trading Behaviors,” was moderated by Tony 
Takazawa, vice president of global investor relations at EMC 
Corporation. Panelists included Jason Lenzo, director of equities 
and fixed income trading at Russell Investments; Tim Quast, 
managing director at ModernIR; and David Weild, co-author of 
this study. Each of the five points was separately voted on and 
approved by the audience: 

We call on the SEC and Congress to provide issuers (job creators) with: 
1. 	 Equal standing: Issuers must have equal input to the trade execution
 

community on market structure.
 
2. 	 Representation: A standing issuer advisory council to the SEC made up 

of issuers and issuer advocates. 
3. 	 Transparency, timeliness and completeness: Issuers deserve
 

real-time trading and ownership data of all long and short activity.
 
4. 	 Choice in market structure: No more one-size-fits-all market structures. 
5. 	 Market structures that encourage fundamental investment
 

strategies over trading strategies.
 

40 The trouble with small tick sizes 



   

	 	 	 	 	 	 	 	 	 	 	 	 	 	

  

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Appendix A
 

Proposed preliminary draft legislation: The JOBS Act, Part 2 
The authors would like to thank Adele Hogan for providing the content in this appendix. 

[Suggested proposed preliminary draft for discussion purposes only] 

Calendar No. 
___ TH CONGRESS 
___ SESSION 

H.R. __________ 

IN THE SENATE OF THE UNITED STATES
 
____ __, 201_
 

Received; read the first time
 
____ __, 201_
 

Read the second time and placed on the calendar
 

AN ACT
 
To amend the Securities and Exchange Act of 1934 (the “1934 Act”) to require the Securities and Exchange Commission 
(“SEC”) to implement a plan to test whether each publicly listed company (a “Public Company”) under Sections 12 (b) or 12(g) 
of the 1934 Act should be allowed to choose to have an increased trading spread associated with its equity securities for a set 
period of time (“Customized Trading Spreads”) if such company’s board of directors deems Customized Trading Spreads to be 
desirable in order (i) to attract research coverage and broker support to the Public Company, (ii) to attract market making to the 
Public Company, (iii) to support capital-raising for the Public Company, (iv) to increase the stability of the shareholder base and 
lessen volatility in the share price of the Public Company or (v) to be otherwise in the best interests of the Public Company and 
its long-term investors. 

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, 

The trouble with small tick sizes 41 



  

 

  
 

   
 

   
   

    
    
    
    
   

 
   
   
   
   
   
   
   
   
  

    
   
    
   
     
     
    
    

SECTION 1. SHORT TITLE.
 
This Act may be cited and referred to as the ‘‘Customized Trading Spreads for a Stronger Capital Market and to Foster Business
 
and Job Growth of 201_.’’
 

SECTION. 2. CUSTOMIZED SPREADS
 
(a) 	 IN GENERAL — Section 11A of the 1934 Act is amended 
(a) (1) 	 by striking the “and” in subparagraph (a)(1)(C)(iv), by replacing the period at the end of a subparagraph with a semicolon 

and by adding an “and” at the end of subparagraph (a)(1)(C)(v) 
(a) (2) 	 by inserting the following after subparagraph (a)(1)(C)(v): 

(a)(1)(C) “(vi). a mechanism for protecting investors from market conditions that, due to the unforeseen consequences 
of regulation, may artificially and unintentionally favor one type or size of company over another in the 
capital formation process, thereby limiting the investment and growth opportunities (including the ability to 
hire additional employees) of some companies whose equity securities may be or are held by investors by 
ensuring that a company registered or to be registered under Sections 13(d) or 13(g) of the 1934 Act (a 
“Public Company”) may choose Customized Trading Spreads within certain parameters to be established from 
time to time by the SEC.” 

(a) (3) 	 by inserting a new paragraph at the end of subsection 1(a)(1)(E) -­
“In consideration of the aforementioned protection of investors, the SEC shall be directed to involve the investing public, 
Public Companies, clearing and depository organizations, exchanges (including the New York Stock Exchange (“NYSE”) 
and NASDAQ), the Financial Regulatory Association (“FINRA”), member firms and other market participants as the 
SEC may deem appropriate (the “Participants”) in developing and implementing a plan allowing the boards of directors 
of companies to select for a fixed period, or periods of time to be determined, customized trading spreads, perhaps 
of $0.02, $0.03, $0.05, $0.10, $0.15 or $0.25 per share, but not to exceed 5% of share price and as ultimately 
approved by the SEC (the “Plan”), and the Plan shall consist of implementation phases for the purpose of maximizing 
the benefits and checkpoints to make any appropriate changes to minimize or avoid any unintended consequences 
related to the Plan; 
a) During the phase-in period, the SEC shall set a minimum number of Public Companies based on criteria it deems 
appropriate taking into consideration the recommendations from the Participants, to participate in the Plan; 
b) The phase-in period shall be as set by the SEC based on input from the Participants, but may take the form of 
something like the following: 

i) Phase I –— An evaluation of pricing and trading patterns by the Participants during which a minimum of 100 
equity issues listed on each of at least the NYSE and NASDAQ will quote using the Customized Trading 
Spreads in the manner outlined in the Plan; 
ii) Phase II 

42 The trouble with small tick sizes 



   

     
      

  
     
    

    
    
    
   
   
   
  
  
    
   
    
   
    

  
    
    
   

(a) approximately 500 exchange-listed equity issues will quote, and the Participants and the SEC will continue 
to evaluate the transition to Customized Trading Spreads and the Plan’s impact on the markets and the 
industry, especially as the transition and the Plan relate to capacity, liquidity, research and trading patterns; 
(b) Participants and the SEC will evaluate the results of the first two phases and determine if they are 
technically prepared for broader implementation, and what adjustments, if any, might be appropriate; 
iii) Phase III — After determining the Plan’s readiness for all markets, the Participants will recommend a full 
implementation of customized trading spreads (considering it would cause no adverse impacts to the investing 
public other than an increase in trade execution costs), and will continue to evaluate the results of previous 
phases and the industry’s transition; 

c) Participants may work separately or jointly with each other and the SEC, and commission a third party or parties
 
to perform a detailed statistical analysis of quoting and trading activity beginning with Phase I and extending through
 
the Phase-In Period.
 
d) Fallback and recovery — Participants will require specific procedures for Participant fallback.
 

i) There may be an after close-of-market fallback to $0.01 (penny) pricing as a last resort after all other efforts
 
have been exhausted for equity quoting for the phases;
 
ii) If a Participant chooses to revert from Customized Trading Spreads back to $0.01 quoting, all exchanges
 
quoting the applicable securities must agree to fallback as well;
 
iii) If a clearing or settlement entity cannot process the first day’s trading activity, the Participants trading the 

issues cleared or settled will open with the applicable Customized Trading Spreads on the following business day;
 
iv) Each Participant will submit its own procedures on how to deal with open orders on issues quoted in the
 
Customized Trading Spreads format and the circumstances under which they will revert back to $0.01 pricing,
 
subject to approval from time to time by the SEC.
 

The trouble with small tick sizes 43 



  

	 	 	 	 	 	 	 	 	 	 	 	 	 	

  
  
  
  
  

  
  
  
  
  
    
   
   
   
  

  
  

   
   
   
   
   

   

Appendix B
 

Proposed preliminary phase-in implementation plan 
The authors would like to thank Adele Hogan for providing the content in this appendix. 

[Suggested proposed preliminary draft for discussion purposes only] 

Commission notice: 
Implementation plan for companies to choose if they want to designate their equity securities to have an increased trading 
fee associated with them (customized spreads) in the equities and options markets 

Exchange committee on customized, stepped-up trading prices/spreads 

Table of contents 
I. Introduction 
II. Background 
III. Implementation strategy 
IV. Testing and readiness reporting 
V. Implementation phases 

A. Phase I (Limited exchange-listed issues) 
B. Phase IIA (Additional exchange-listed issues) 
C. Phase IIB (Full conversion of exchange-listed issues and/or all options checkpoint) 
D. Phase III (All markets, full implementation) 
E. Checkpoints

 1. Checkpoint I (Pre-implementation evaluation)
 2. Checkpoint II (Determine readiness for additional exchange-listed issues)
 3. Checkpoint III (Determine readiness for full implementation of exchange-listed issues and/or all options)
 4. Checkpoint IV (Determine readiness for all markets, full implementation) 

F. Post phase-in process 
VI. Fallback/recovery 
VII. Summary 

44 The trouble with small tick sizes 



   

 
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 
 

 
 

 
 

 

 
 

 
 

 
 
 
 

 

Section I — Introduction 
On [_____ ___, 201_], the Securities and Exchange Commission (“Commission”) proposed for comment a plan to provide 
certain companies registered under Section 12(g) of the Securities and Exchange Act of 1934 (“Listed Companies”) with 
the option to choose Customized Trading Spreads related to their equity securities. In order for the U.S. equities markets to 
once again be a stronger vehicle for companies to raise capital and thereby create economic growth and job opportunities, 
Congress has directed the Commission to develop a plan to allow Listed Companies’ boards of directors to select an optional 
step-up in trading prices for equity securities (“Customized Trading Spreads”). Congress has directed the Commission to 
increase the ability of Listed Companies and companies that wish to become Listed Companies to access the U.S. securities 
markets and to provide more shareholder base stability. This proposal is intended to increase funding and shareholder stability 
for Listed Companies, which would allow them to create jobs and develop new products and services, while at the same time 
allowing more investors to participate in the growth opportunities of a wider range of companies with different sizes of market 
capitalization. 

When Regulation NMS and the Order Handling Rules were implemented in 2005 and 1997, respectively, the ability of companies 
with under $100 million of potential market capitalization to do an initial public offering (“IPO”) of listed required equity securities 
dropped off precipitously and has not recovered. The U.S.-registered securities market dropped from the most popular market 
in the world to the sixth-most popular for new IPOs of that size. The Commission understands Congress’ concern that investors 
should have the opportunity to invest in mid-size and small companies, particularly since many of these companies formerly 
did relatively small IPOs that probably could not take place in today’s market structure. Those small and mid-sized companies 
obtained funding and grew to be some of the largest and most prominent companies in the U.S. today, collectively employing 
hundreds of thousands of people, including such prominent companies as Apple, Intel and Microsoft. 

On [_____ ___, 201_], the Commission ordered the NYSE Euronext (“NYSE”), the Chicago Board Options Exchange Inc. 
(“CBOE”), NASDAQ Capital Market (“NASDAQ”), the Financial Industry Regulatory Authority (“FINRA”) and others (“Participants”) to 
act jointly in discussing, developing and submitting to the Commission a plan to implement (“Implementation Plan”) Customized 
Trading Spreads at a public company’s option for specified periods of time in the equities and options markets, beginning no 
later than [_____ ___, 201_], and in implementing the Implementation Plan. 

As mandated by the Commission order, this plan has been discussed with interested market participants, including the 
Securities Industry and Financial Markets Association (“SIFMA”) and its members; the Depository Trust & Clearing Corporation 
(“DTCC”) and its two operating subsidiaries, the National Securities Clearing Corporation (“NSCC”) and the Depository Trust 
Company (“DTC”); the Options Clearing Corporation (“OCC”); the Securities Industry Automation Corporation (“SIAC”); the 
Intermarket Trading System Operating Committee (“ITSOC”); the Options Price Reporting Authority (“OPRA”); the Consolidated 
Tape Association (“CTA”); and the Consolidated Quote Operating Committee (“CQOC”) (“Interested Parties”). The Participants 
submitted to the Commission a plan for a phased-in implementation of the Implementation Plan. The purpose of the phase-in 
period is to have an orderly implementation with an opportunity to confirm that there are no unintended consequences of the 
Implementation Plan. The checkpoint phases thereafter are intended to analyze how the phasing periods work. 

The trouble with small tick sizes 45 



  

 
 

 
 

 
 
 

 

 
 

 
 

 
 

 
 

 
 

 
 

 

 
 

 
 

 
 

 
 

 
 

Section II — Background 
In mid-1997, in recognition of the potential benefits to the investing public of Customized Trading Spreads for equity securities, 
the Commission urged Participants to work on the Implementation Plan. SIFMA and the equities and options markets formed a 
Customized Trading Spread Committee in [_____ ___, 201_] to develop a Customized Trading Spread implementation plan and 
coordinate a smooth transition. 

Section III — Implementation strategy 
The Participants recommend a phased-in implementation, consisting of three phases, for the conversion to the new choice 
of Customized Trading Spreads that reduces the risk to the investing public, issuers, Participants, clearing and depository 
organizations, and member firms. This implementation period (“Phase-In Period”) will begin on [_____] and will end with full 
implementation for all equities and options on or before [_____]. 

The Participants believe a phased-in implementation is the most effective way to ensure that markets continue to operate in 
an efficient, orderly and fair manner, while mitigating the risk of fallback, and allows Participants to determine the impact of 
Customized Trading Spreads on trading rules and the intermarket system’s capacity during historically high-volume times (e.g., 
option expirations, triple witching). 

In order to mitigate the risk to the investing public of trading and quoting message rates that could possibly overwhelm 
industry capacity, thereby producing stale information, the Participants recommend that during the Phase-In Period, a minimum 
participation in the number of companies and a set schedule of pricing choices for quoting should be applied and continued 
through the last day that this Implementation Plan is in effect. 

The recommended pricing choices schedule from which companies may choose for quoting in their equity securities is as follows: 
For equity issues (not to exceed 5% of share price): $0.01 pricing choice, $0.03 pricing choice, $0.05 pricing choice, $0.10 
pricing choice and $0.25 pricing choice 
For option issues quoted under $3 a contract: $0.05 pricing choice 
For option issues quoted at $3 a contract and greater: $0.10 pricing choice 

The Participants agree to abide by the schedule above while the Implementation Plan is in effect. 

The Participants may work separately and/or jointly, and may commission a third party or parties to perform a detailed 
statistical analysis of quoting and trading activity beginning with Phase I (limited exchange-listed issues) and extending through 
the Phase-In Period. For Phase I and Phase IIA (additional exchange-listed issues), the Participants will agree on the equity 
issues (and options on those equities). The result of the study or studies will form the basis for the Participants’ study or 
studies on systems’ capacity, liquidity and trading behavior, which is due to the Commission no more than 60 days after full 
implementation, (on or before [____]) of the new choices of Customized Trading Spread pricing. 

Importantly, at the end of the Phase-In Period, the price choices described above will remain in effect through the last day that 
this plan is in effect — until the Commission approves rules for each Participant that designate the minimum increment by which 
equities and options are quoted, or until any other date identified by the Commission. The Participants’ implementation project 
schedule and milestones can be found in Appendix A. 

46 The trouble with small tick sizes 



   

 
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 

 
 

 

 
 

 
 

 

Section IV — Testing and readiness reporting 
The Participants have discussed their readiness at each of the Exchange Committee meetings during the plan preparation. After
 
the plan is submitted to the Commission, the Participants, in conjunction with the Interested Parties, will discuss readiness prior
 
to the checkpoints listed in this plan. The schedule for the Participants’ meetings during plan preparation is as follows:
 
[_____ ___, 201_]
 
[_____ ___, 201_]
 
[_____ ___, 201_]
 

In addition to the Exchange Committee meetings, Participants report on their status and firm testing status at the biweekly
 
SIFMA Testing and Implementation Subcommittee meetings and the monthly SIFMA Steering Committee meetings. The schedule
 
for these meetings, prior to Phase I implementation, is as follows:
 
[_____ ___, 201_]
 
[_____ ___, 201_]
 

The equity issues (and options on those equities) that will quote in the higher amounts for Phase I that have been identified
 
and widely disseminated. The equity issues (and options on those equities) that will quote for Phase IIA will be identified by the
 
end of [_____ ___, 201_] and by the beginning of [_____ ___, 201_], respectively. These time frames meet the approximate
 
two-months’ notice that the member firms have identified to SIFMA that they need in order to inform their customers.
 
The Participants and SIFMA will ensure dissemination to their respective membership bases through the use of websites,
 
membership bulletins and the SIFMA committees.
 

Section V — Implementation phases 
A. Phase I — Limited exchange-listed issues 
The Participants recommend that the Phase-In Period consist of an initial phase, to begin on [_____ ___, 201_] and continue 
through the last day that this plan is in effect, during which a minimum of 10 to 15 exchange-listed equity issues listed on each 
of at least the NYSE and NASDAQ (and options on those equities) will quote (per the recommended quote price choice schedule 
documented earlier) and where the Participants, with the cooperation of the Interested Parties, will evaluate the industry’s 
transition. Due to the concerns of the industry and the Participants regarding the impact of the new pricing on message traffic 
and trading patterns, an evaluation of pricing by the Participants will commence beginning with this phase. 

B. Phase IIA — Additional exchange-listed issues 
Participants recommend that Phase I be followed by a partial conversion (per the recommended quote price choice schedule 
documented earlier) of approximately 50 to 100 exchange-listed equity issues (and options on those equities) beginning on 
[_____ ___, 201_] and continuing through the last day that this plan is in effect. The Participants and the Interested Parties will 
continue to evaluate the transition to the new choice of Customized Trading Spreads and its impacts on the industry, especially 
as they relate to capacity, liquidity and trading patterns. 

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C. Phase IIB — Full conversion of exchange-listed issues and/or all options checkpoint 
At Checkpoint III (determine readiness for full implementation of exchange-listed issues and/or all options), the Participants will 
evaluate the results of the first two phases of the new choice of Customized Trading Spread quoting. If, after consultation with 
the Interested Parties and the Commission, the Participants believe that the Participants and Interested Parties are technically 
prepared for full implementation, and this would not cause adverse impacts to the investing public, the Participants may elect 
to fully convert all exchange-listed issues and/or all option issues to the new choice of Customized Trading Spread quoting 
(per the recommended quote price choice schedule documented earlier). Any decision to fully convert exchange-listed issues 
and/or all options will be made during the period between [_____ ___, 201_] and [_____ ___, 201_], and a notice will be 
widely disseminated by the Participants and the SIFMA to the industry and the investing public at least 30 calendar days before 
implementation. 

D. Phase III — All markets, full implementation 
At Checkpoint IV (determine readiness for all markets, full implementation), the Participants will evaluate the results of all previous 
phases. If, after consultation with the Interested Parties and the Commission, the Participants believe that the Participants and 
the Interested Parties are technically prepared for full implementation, and this would not have an adverse impact on the investing 
public, the Participants recommend that full implementation of the new choice of Customized Trading Spreads quoting for equities 
and options (per the recommended quote price choice schedule documented earlier) begin on or before [_____ ___, 201_] 
and continue through the last day that this plan is in effect. The Participants, with the cooperation of the Interested Parties, will 
evaluate the industry’s transition to full implementation of the new choice of Customized Trading Spreads in all issues, and joint 
and/or independent studies will continue evaluating the impacts of the new choice of Customized Trading Spreads pricing. 

E. Checkpoints 
The Participants have identified five checkpoints where the Participants will formally evaluate the results of the phase-in 
implementation program and determine the industry’s ability to function without disruption to the investing public in a new choice 
of Customized Trading Spreads environment. Throughout the period during which this plan is effective, however, the Participants 
will monitor the impact of the new choice of Customized Trading Spreads on the industry and will confer with the Commission on 
those impacts. 

1. Checkpoint I — Pre-implementation evaluation 
The first checkpoint will take place on [_____ ___, 201_], when the Participants will poll the Interested Parties, review industry-
mandated test results and confer with the Commission on the industry’s preparedness to proceed with Phase I on [_____ ___, 
201_]. While the Participants have defined fallback scenarios for themselves during this phase (see Section VI — Fallback/ 
recovery) and have determined that no single firm failure will cause a fallback to fractional pricing, the Participants will be 
prepared to confer with the Commission if it appears that multiple failures are placing the investing public at risk or at a 
disadvantage. The Participants have identified the equity issues (and options on those issues) to be quoted in the new choice of 
Customized Trading Spreads in Phase 1. 

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2. Checkpoint II — Determine readiness for additional exchange-listed issues 
The second checkpoint will take place on [_____ ___, 201_], when the Participants, after polling the Interested Parties, will 
confer with the Commission on the industry’s preparedness to proceed with Phase IIA of the Phase-In Period on [_____ ___, 
201_]. While the Participants have defined fallback scenarios for themselves during this phase (see Section VI — Fallback/ 
recovery) and have determined that no single firm failure will cause a fallback to fractional pricing, the Participants will be 
prepared to confer with the Commission if it appears that multiple failures are placing the investing public at risk or at a 
disadvantage. By the end of [_____ ___, 201_], the Participants will identify the additional equity issues (and options on those 
equities) to be quoted in the new choice of Customized Trading Spreads in the second phase. 

3. Checkpoint III — Determine readiness for full implementation of exchange-listed issues and/or all options 
The third checkpoint will occur on [_____ ___, 201_]. The Participants will evaluate the results of the first two phases of the 
new choice of Customized Trading Spreads quoting. If, after consultation with the Interested Parties and the Commission, 
the Participants believe that the Participants and the Interested Parties are technically prepared for full implementation and 
this would not have an adverse impact on the investing public, the Participants may elect to fully convert all exchange-listed 
issues and/or all option issues to the new choice of Customized Trading Spreads quoting (per the recommended schedule 
documented earlier). The Participants may also elect to implement a penny pilot in selected option issues. Any decision to 
fully convert exchange-listed issues and/or all options or to implement a penny pilot on options will be made during the period 
between [_____ ___, 201_] and [_____ ___, 201_], and a notice will be widely disseminated by the Participants and the SIFMA 
to the industry and the investing public at least 30 calendar days before implementation. 

4. Checkpoint IV — Determine readiness for all markets, full implementation 
The fourth checkpoint will occur on [_____ ___, 201_], when the Participants will evaluate the results of the first three phases of 
the new choice of Customized Trading Spreads quoting. If, after consultation with the Interested Parties and the Commission, 
the Participants believe that the Participants and Interested Parties are technically prepared for full implementation and this 
would not have an adverse impact on the investing public, the Participants will proceed with full implementation of all exchange-
listed issues (if not already quoting in the new choice of Customized Trading Spreads), NASDAQ issues and all options on the 
issues (if not already quoting in the new choice of Customized Trading Spreads) on or before [_____ ___, 201_]. 

F. Post phase-in process 
The post phase-in process will begin at the end of the Phase-In Period (on or before [_____ ___, 201_]) and will last no more 
than two months. The Participants will review the Phase-In Period and the impact of the new choice of Customized Trading 
Spreads on systems capacity, liquidity and trading behavior. The Participants will submit joint and/or individual studies that 
document the impacts of the new choice of Customized Trading Spreads and may contain a recommendation on whether 
there should be a uniform minimum increment for equities or options or both. Absent Commission action on the study and 
recommendations, each Participant will submit proposed rule changes to establish its choice of minimum increments by which 
equities or options are quoted on its market no later than 30 calendar days after the filing of the study. 

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Section VI — Fallback/recovery 
The Participants, after consultation with the Interested Parties, have agreed that Phase I and Phase III of the Phase-In Period 
require specific procedures for Participant fallback. Throughout the period during which this plan is effective, however, the 
Participants will monitor the impact of the new choice of Customized Trading Spread-based quoting and will confer with the 
Commission on those impacts. 

For options quoting during Phase I and Phase III, there will be no intra-day fallback to fractional pricing, and issues must quote on 
every exchange in the same format, either the new choice of Customized Trading Spreads or fraction. For equity quoting during 
Phase I and Phase III, there may be an intra-day fallback to fractional pricing, as a last resort after all other efforts have been 
exhausted to remediate the problem. Specific details of the fallback plan will be published prior to the [_____ ___, 201_] start 
date. For equity issues, in the event that a regional exchange Participant experiences a problem on day one of Phase I or Phase 
III that would require a fallback to fractional quoting, the Participant must attempt to fix the problem and may halt trading if the 
primary exchange for affected issues continues to quote in the new choice of Customized Trading Spreads. A problem at one of 
the Participants on day one of Phase I or Phase III will not necessitate a trading halt or fallback to fractional quoting by the other 
Participants. However, if any of the primary exchanges revert back to fractional quoting on day two, all other equity Participants 
quoting the issues on the affected primary exchange will also revert back to fractional quoting for those issues. Any issues 
falling back to fractions must continue to quote in fractions until the Monday following the correction of the problem. 

For option issues, a problem with one of the Participants during Phase I or Phase III will not necessitate a trading halt by the 
other Participants. If an options exchange on the following day must fallback to fractional quoting and multiple-listed issues are 
involved in the fallback, all options exchanges will fallback. If the underlying equity reverts back to quoting in fractions, options 
on that equity may continue to quote in the new choice of Customized Trading Spreads. If a Participant chooses to revert the 
options back to fractional quoting until such time as the underlying equity issues are ready to convert to the new choice of 
Customized Trading Spread quoting, the conversion must occur overnight, and for multiple-listed issues, all options exchanges 
quoting the issues must agree to fallback as well. Any option issues falling back to fractions must continue to quote in fractions 
until the Monday following the correction of the problem. 

Any programmatic problems encountered by the Participants after day one of Phase I or Phase III and any capacity issues will 
be treated like any other production problem by each Participant and will be subject to their normal operating procedures. As 
noted above, however, the Participants will monitor the impact of the new choice of Customized Trading Spreads-based quoting 
on the industry throughout the time that this plan is effective and will confer with the Commission on the impacts. If a clearing 
or settlement entity cannot process the first day’s trading activity, the Participants trading the issues cleared or settled by the 
entity will open for the new choice of Customized Trading Spreads on the following business day. If the clearing or settlement 
entity still cannot process trading activity, the Participants may halt trading in the issues until the entity can successfully process 
the first day’s trades. 

Each Participant will submit its own procedures on how to deal with open orders on issues quoting in the new choice of 
Customized Trading Spread format that will revert back to fractional pricing. 

50 The trouble with small tick sizes 



   

 
 

 
 

 
 

 

 
 

 

Section VII — Summary 
The Participants with the cooperation of the Interested Parties have agreed upon an approach to implement a phased-in 
implementation program for the new choice of Customized Trading Spread quoting that provides the maximum safety for the 
industry and the investing public, while satisfying the Commission order on the new choice of Customized Trading Spread 
implementation. 

The implementation of a limited number of equities (and options on those equities) quoting at pre-described price choices in the 
first phase tests the operational readiness of the industry and at the same time minimizes the ill effects to the investing public of 
a fallback to fractional quoting. 

Following Phase I is an additional limited phase of new choice of Customized Trading Spreads quoting of equities and options at 
pre-described phased checkpoints. The goals of Phase IIA are to evaluate projected capacity estimates, impacts to liquidity and 
new trading patterns in advance of full implementation of the new choice of Customized Trading Spreads pricing. 

The trouble with small tick sizes 51 



  

 
 
 

Appendix C
 

Tick size standards around the world 
Tick sizes vary globally, but mostly as a function of share price. This near-universal method of tick size variation (oscillating 
tick sizes according to share price) fails to account for a company’s market float, liquidity and trading volume, among other 
characteristics. Effective tick size regimens should optimally be customized to these characteristics of each public company; 
computer technology is now at the point where mass customization of tick sizes could be cost-effectively achieved. 

Market Currency Stock price per share Tick size Relative tick size1 

Australia AUD < 0.10 0.001 ≥ 0.1% 

0.10 to 0.50 0.005 5% to 1% 

> 0.50 0.01 ≤ 2% 

Austria EUR All shares 0.01 

Austria – ATX stocks EUR < 10.00 0.001 ≥ 0.01% 

10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

≥ 100.00 0.05 ≤ 0.05% 

Bahrain BHD All shares trading in BHD 0.001 

USD0.01 to USD0.50 USD0.005 50% to 1% 

> USD0.51 USD0.01 ≤ 2% 

Belgium EUR < 10.00 0.001 ≥ 0.01% 

10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

≥ 100.00 0.05 ≤ 0.05% 

Certain stocks > 10.00 0.005 ≤ 0.05% 

Brazil BRL All shares 0.01 

Bulgaria BGN All shares 0.001 

Canada CAD < 0.50 0.005 ≥ 1% 

≥ 0.50 0.01 ≤ 2% 

Cyprus EUR < 3.00 0.01 ≥ 0.33% 

3.00 to 59.98 0.02 0.67% to 0.03% 

≥ 60.00 0.05 ≤ 0.08% 

Czech Republic CZK < 200.00 0.01 ≥ 0.01% 

200.00 to 999.9 0.1 0.05% to 0.01% 

≥ 1,000.00 1 ≤ 0.1% 

1 Tick size as a percentage of price per share. 

52 The trouble with small tick sizes 



   

Market Currency Stock price per share Tick size Relative tick size1 

Denmark – OMX C20 stocks DKK < 0.50 0.0001 ≥ 0.02% 

0.50 to 0.9995 0.0005 0.1% to 0.05% 

1.00 to 4.999 0.001 0.1% to 0.02% 

5.00 to 9.995 0.005 0.1% to 0.05% 

10.00 to 49.99 0.01 0.1% to 0.02% 

50.00 to 99.95 0.05 0.1% to 0.05% 

100.00 to 499.90 0.1 0.1% to 0.02% 

500.00 to 999.50 0.5 0.1% to 0.05% 

1,000.00 to 4,999.00 1 0.1% to 0.02% 

5,000.00 to 9,995.00 5 0.1% to 0.05% 

10,000.00 to 49,990.00 10 0.1% to 0.02% 

≥ 50,000.00 50 ≤ 0.1% 

Egypt EGP All shares 0.01 

Finland EUR All shares 0.01 

Finland – OMXH25 stocks DKK < 0.50 0.0001 ≥ 0.02% 

0.50 to 0.9995 0.0005 0.1% to 0.05% 

1.00 to 4.999 0.001 0.1% to 0.02% 

5.00 to 9.995 0.005 0.1% to 0.05% 

10.00 to 49.99 0.01 0.1% to 0.02% 

50.00 to 99.95 0.05 0.1% to 0.05% 

100.00 to 499.90 0.1 0.1% to 0.02% 

500.00 to 999.50 0.5 0.1% to 0.05% 

1,000.00 to 4,999.00 1 0.1% to 0.02% 

5,000.00 to 9,995.00 5 0.1% to 0.05% 

10,000.00 to 49,990.00 10 0.1% to 0.02% 

≥ 50,000.00 50 ≤ 0.1% 

France EUR < 10.00 0.001 ≥ 0.01% 

10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

≥ 100.00 0.05 ≤ 0.05% 

Certain stocks > 10.00 0.005 ≤ 0.05% 

Germany EUR < 10.00 0.001 ≥ 0.01% 

10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

≥ 100.00 0.05 ≤ 0.05% 

Greece EUR < 1.00 0.001 ≥ 0.1% 

1.00 to 2.99 0.01 1% to 0.33% 

3.00 to 59.98 0.02 0.67% to 0.03% 

≥ 60.00 0.05 ≤ 0.08% 

Hong Kong HKD ≤ 0.25 0.001 ≥ 0.4% 

0.255 to 0.50 0.005 1.96% to 1% 

0.51 to 10.00 0.01 1.96% to 0.1% 

10.02 to 20.00 0.02 0.2% to 0.1% 

20.05 to 100.00 0.05 0.25% to 0.05% 

100.10 to 200.00 0.1 0.1% to 0.05% 

200.20 to 500.00 0.2 0.1% to 0.04% 

500.50 to 1,000.00 0.5 0.1% to 0.05% 

1 Tick size as a percentage of price per share. 

The trouble with small tick sizes 53 



  

 

 

Market Currency Stock price per share Tick size Relative tick size1 

Hong Kong HKD 1,001.00 to 2,000.00 1 0.1% to 0.05% 

(continued) 2,002.00 to 5,000.00 2 0.1% to 0.04% 

5,005.00 to 9,995.00 5 0.1% to 0.05% 

Hungary HUF Certain shares 1 

Certain shares 5 

Hungary – BUX stocks HUF All shares 1 

India INR All shares 0.05 

Indonesia IDR < 200.00 1 ≥ 0.5% 

200.00 to 495.00 5 2.5% to 1% 

500.00 to 1990.00 10 2% to 0.5% 

2,000.00 to 4,975.00 25 1.25% to 0.5% 

≥ 5,000.00 50 ≤ 1% 

Ireland EUR All shares 0.001 

Ireland – ISEQ 20 stocks EUR < 10.00 0.001 ≥ 0.01% 

10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

≥ 100.00 0.05 ≤ 0.05% 

Israel ILS All shares 0.01 

Italy EUR < 0.25 0.0001 ≥ 0.04% 

0.25 to 0.9995 0.0005 0.2% to 0.05% 

1.00 to 1.999 0.001 0.1% to 0.05% 

2.00 to 4.9975 0.0025 0.125% to 0.05% 

5.00 to 9.995 0.005 0.1% to 0.05% 

≥ 10.00 0.01 ≤ 0.1% 

Japan JPY < 2,000.00 1 ≥ 0.05% 

2,000.00 to 2,295.00 5 0.25% to 0.22% 

3,000.00 to 29,990.00 10 0.33% to 0.03% 

30,000.00 to 49,950.00 50 0.17% to 0.1% 

50,000.00 to 99,900.00 100 0.2% to 0.1% 

100,000.00 to 999,000.00 1,000 1% to 0.1% 

1,000,000.00 to 10,000 1% to 0.05% 
19,990,000.00 

20,000,000.00 to 50,000 0.25% to 0.17% 
29,950,000.00 

≥ 30,000,000.00 100,000 ≤0.33% 

Mexico MXN < 1,000,000,000.00 0.01 ≥ 1 × 10-11 

Netherlands EUR < 10.00 0.001 ≥ 0.01% 

10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

≥ 100.00 0.05 ≤ 0.05% 

Certain stocks > 10.00 0.005 ≤ 0.05% 

New Zealand NZD < 0.20 0.001 ≥ 0.5% 

≥ 0.20 0.01 ≤ 5% 

1 Tick size as a percentage of price per share. 

54 The trouble with small tick sizesMarket Currency Stock price per share Tick size Relative tick size1 

Norway NOK < 0.50 0.0001 ≥ 0.02% 

0.50 to 0.9995 0.0005 0.1% to 0.05% 

1.00 to 4.999 0.001 0.1% to 0.02% 

5.00 to 9.995 0.005 0.1% to 0.05% 

10.00 to 49.99 0.01 0.1% to 0.02% 

50.00 to 99.95 0.05 0.1% to 0.05% 

100.00 to 499.90 0.1 0.1% to 0.02% 

500.00 to 999.50 0.5 0.1% to 0.05% 

1,000.00 to 4,999.00 1 0.1% to 0.02% 

5,000.00 to 9,995.00 5 0.1% to 0.05% 

10,000.00 to 49,990.00 10 0.1% to 0.02% 

≥ 50,000.00 50 ≤ 0.1% 

Poland PLN < 50.00 0.01 ≥ 0.02% 

50.00 to 99.95 0.05 0.1% to 0.05% 

100.00 to 499.90 0.1 0.1% to 0.02% 

≥ 500.00 0.5 ≤ 0.1% 

Portugal EUR < 10.00 0.001 ≥ 0.01% 

10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

≥ 100.00 0.05 ≤ 0.05% 

Certain stocks > 10.00 0.005 ≤ 0.05% 

Qatar QAR All shares 0.01 

Romania RON < 0.10 0.0001 ≥ 0.1% 

0.10 to 0.499 0.001 1% to 0.2% 

0.50 to 0.995 0.005 1% to 0.5% 

1.00 to 4.99 0.01 1% to 0.2% 

5.00 to 9.95 0.05 1% to 0.5% 

≥ 10.00 0.1 ≤ 1% 

Saudi Arabia SAR ≤ 25.00 0.05 ≥ 0.2% 

25.10 to 50.00 0.1 0.4% to 0.2% 

≥ 50.25 0.25 ≤ 0.5% 

Singapore SGD < 1.00 0.005 ≥ 0.5% 

1.00 to 2.99 0.01 1% to 0.33% 

3.00 to 4.98 0.02 0.67% to 0.4% 

5.00 to 9.95 0.05 1% to 0.5% 

≥ 10.00 0.1 ≤ 1% 

Spain EUR ≤ 50.00 0.01 ≥ 0.02% 

> 50.00 0.05 ≤ 0.1% 

Certain stocks 0.005 

Spain – IBEX35 and EUR < 10.00 0.001 ≥ 0.01% 

IBEX medium stocks 10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

≥ 100.00 0.05 ≤ 0.05% 

Sweden SEK < 0.50 0.0001 ≥ 0.02% 

0.50 to 0.9995 0.0005 0.1% to 0.05% 

1.00 to 4.999 0.001 0.1% to 0.02% 

1 Tick size as a percentage of price per share. 

The trouble with small tick sizes 55 



  

Market Currency Stock price per share Tick size Relative tick size1 

Sweden SEK 5.00 to 9.995 0.005 0.1% to 0.05% 

(continued) 10.00 to 49.99 0.01 0.1% to 0.02% 

50.00 to 99.95 0.05 0.1% to 0.05% 

100.00 to 499.90 0.1 0.1% to 0.02% 

500.00 to 999.50 0.5 0.1% to 0.05% 

1,000.00 to 4,999.00 1 0.1% to 0.02% 

5,000.00 to 9,995.00 5 0.1% to 0.05% 

10,000.00 to 49,990.00 10 0.1% to 0.02% 

≥ 50,000.00 50 ≤ 0.1% 

Switzerland – Blue chip stocks CHF < 0.50 0.0001 ≥ 0.02% 

0.50 to 0.9995 0.0005 0.1% to 0.05% 

1.00 to 4.999 0.001 0.1% to 0.02% 

5.00 to 9.995 0.005 0.1% to 0.05% 

10.00 to 49.99 0.01 0.1% to 0.02% 

50.00 to 99.95 0.05 0.1% to 0.05% 

100.00 to 499.9 0.1 0.1% to 0.02% 

500.00 to 999.50 0.5 0.1% to 0.05% 

1,000.00 to 4,999.00 1 0.1% to 0.02% 

5,000.00 to 9,995.00 5 0.1% to 0.05% 

≥ 10,000.00 10 ≤ 0.1% 

Switzerland – Non-blue chip stocks CHF < 10.00 0.01 ≥ 0.1% 

10.00 to 99.95 0.05 0.5% to 0.05% 

100.00 to 249.90 0.1 0.1% to 0.04% 

250.00 to 499.75 0.25 0.1% to 0.05% 

500.00 to 999.50 0.5 0.1% to 0.05% 

1,000.00 to 4,999.00 1 0.1% to 0.02% 

≥ 5,000.00 5 ≤ 0.1% 

Switzerland – SMI expanded stocks CHF < 0.50 0.0001 ≥ 0.02% 

0.50 to 0.9995 0.0005 0.1% to 0.05% 

1.00 to 4.999 0.001 0.1% to 0.02% 

5.00 to 9.995 0.005 0.1% to 0.05% 

10.00 to 49.99 0.01 0.1% to 0.02% 

50.00 to 99.95 0.05 0.1% to 0.05% 

100.00 to 499.9 0.1 0.1% to 0.02% 

500.00 to 999.50 0.5 0.1% to 0.05% 

1,000.00 to 4,999.00 1 0.1% to 0.02% 

5,000.00 to 9,995.00 5 0.1% to 0.05% 

10,000.00 to 49,990.00 10 0.1% to 0.02% 

≥ 50,000.00 50 ≤ 0.1% 

Turkey TRY ≤ 5.00 0.01 ≥ 0.2% 

5.02 to 10.00 0.02 0.4% to 0.2% 

10.05 to 25.00 0.05 0.5% to 0.2% 

25.10 to 50.00 0.1 0.4% to 0.2% 

50.25 to 100.00 0.25 0.5% to 0.25% 

1 Tick size as a percentage of price per share. 

56 The trouble with small tick sizes 



   

Market Currency Stock price per share Tick size Relative tick size1 

UAE (Abu Dhabi) AED ≤ 10.00 0.01 ≥ 0.1% 

10.01 to 100.00 0.05 0.5% to 0.05% 

≥ 100.01 0.1 ≤ 0.1% 

UAE (Dubai) AED ≤ 0.99 0.001 ≥ 0.1% 

1.00 to 9.99 0.01 1% to 0.1% 

10.00 to 99.95 0.05 0.5% to 0.05% 

≥ 100 0.1 ≤ 0.1% 

United Kingdom – AIM stocks GBP < 10.00 0.0001 ≥ 0.001% 

(GBP/USD/EUR) 10.00 to 99.99 0.01 0.1% to 0.01% 

≥ 100.00 0.25 ≤ 0.25% 

United Kingdom – AIM stocks GBX < 10.00 0.0001 ≥ 0.001% 

(GBX) ≥ 10.00 0.25 ≤ 2.5% 

United Kingdom – FTSE 100 stocks GBP < 1.00 0.0001 ≥ 0.01% 

1.00 to 4.9995 0.0005 0.05% to 0.01% 

5.00 to 9.999 0.001 0.02% to 0.01% 

10.00 to 49.995 0.005 0.05% to 0.01% 

50.00 to 99.99 0.01 0.02% to 0.01% 

100.00 to 499.95 0.05 0.05% to 0.01% 

500.00 to 999.90 0.1 0.02% to 0.01% 

1,000.00 to 4,999.50 0.5 0.05% to 0.01% 

5,000.00 to 9,999.00 1 0.02% to 0.01% 

≥ 10,000.00 5 ≤ 0.05% 

United Kingdom – FTSE 250 stocks GBP < 0.50 0.0001 ≥ 0.02% 

0.50 to 0.9995 0.0005 0.1% to 0.05% 

1.00 to 4.999 0.001 0.1% to 0.02% 

5.00 to 9.995 0.005 0.1% to 0.05% 

10.00 to 49.99 0.01 0.1% to 0.02% 

50.00 to 99.95 0.05 0.1% to 0.05% 

100.00 to 499.90 0.1 0.1% to 0.02% 

500.00 to 999.50 0.5 0.1% to 0.05% 

1,000.00 to 4,999.00 1 0.1% to 0.02% 

5,000.00 to 9,995.00 5 0.1% to 0.05% 

10,000.00 to 49,990.00 10 0.1% to 0.02% 

≥ 50,000.00 50 ≤ 0.1% 

United States USD < 1.00 0.0001 ≥ 0.01% 

≥ 1.00 0.01 ≤ 1% 

1 Tick size as a percentage of price per share. 

The trouble with small tick sizes 57 



  

Appendix D
 

Tick size changes on the NASDAQ, NYSE and AMEX 

For all three charts below: 

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic. 
Includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs. 

Tick size changes on the NASDAQ Stock Market overlaid on the drop in the number of small IPOs 

100% 

80% 

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Quote-driven market (pre-Reg. ATS) 
Effective tick size > minimum tick size 

Electronic-order-book market (post-Reg. ATS) 
Effective tick size collapsed to minimum tick size 

A Order Handling Rules 
B Regulation ATS 
C Decimalization 
D Sarbanes-Oxley Act 
E Regulation NMS 

Transactions 
raising less than 
$50 million 

$0.30 

Transactions 
raising at least90% 
$50 million 

$0.25 

70% 

Pe
rc

en
ta

ge
 o

f t
ot

al
 U

.S
. I

PO
s $0.20 

60% 

50% 

40% N
AS

D
AQ

 ti
ck

 s
iz

es

$0.15 

$0.10 
30% 

20% 
$0.05 

10% 

0% $0.00 

A B C D E 

Bankable 
spread or 
effective tick 
size 

Tick size for 
stocks ≥ $101 

Tick size for 
stocks < $102 

11991: $0.125 for NASDAQ stocks ≥ $10; 1997: $0.0625 for NASDAQ stocks ≥ $10. 
21991: $0.03125 for NASDAQ stocks < $10. 

58 The trouble with small tick sizes 



   

Tick size changes on the New York Stock Exchange overlaid on the drop in the number of small IPOs 

100% 

Transactions 
raising at least90% 
$50 million 

80% 

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Quote-driven market (pre-Reg. ATS) 
Effective tick size > minimum tick size 

Electronic-order-book market (post-Reg. ATS) 
Effective tick size collapsed to minimum tick size 

$0.30 

$0.25 

$0.20 

$0.15 

$0.10 

$0.05 

$0.00 

N
Y

SE
 ti

ck
 s

iz
es

 

A Order Handling Rules 
B Regulation ATS 
C Decimalization 
D Sarbanes-Oxley Act 
E Regulation NMS 

Transactions 
raising less than 
$50 million 

70% 

60% 

50% 

40%

Pe
rc

en
ta

ge
 o

f t
ot

al
 U

.S
. I

PO
s 

Bankable 
spread or 
effective tick 
size 

Tick size for 
higher-priced 
stocks1 

20% 

30% 

Tick size for 
mid-priced 
stocks2 

10% 
Tick size for 
lower-priced 

0% stocks3 

A B C D E 

11991: $0.125 for NYSE stocks > $1; 1997: $0.0625 for NYSE stocks ≥ $0.50.
 
21991: $0.0625 for NYSE stocks > $0.50 and < $1.
 
31991: $0.03125 for NYSE stocks < $0.50.
 

Tick size changes on the American Stock Exchange overlaid on the drop in the number of small IPOs 

100% 

80% 

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Quote-driven market (pre-Reg. ATS) 
Effective tick size > minimum tick size 

Electronic-order-book market (post-Reg. ATS) 
Effective tick size collapsed to minimum tick size 

A Order Handling Rules 
B Regulation ATS 
C Decimalization 
D Sarbanes-Oxley Act 
E Regulation NMS 

Transactions 
raising less than 
$50 million 

$0.30 

Transactions 
raising at least90% 
$50 million 

$0.25 

70% 

Pe
rc

en
ta

ge
 o

f t
ot

al
 U

.S
. I

PO
s $0.20 

60% 

50% 

40% AM
EX

 ti
ck

 s
iz

es

$0.15 

Bankable 
spread or 
effective tick 
size 

$0.10 
Tick size for 
higher-priced 
stocks1 

20% 

30% 

Tick size for 
$0.05 mid-priced 

stocks2 

10% 
Tick size for 
lower-priced 

0% $0.00 stocks3 

A B C D E 

11991: $0.125 for AMEX stocks ≥ $1 (raised to ≥ $5 in 1992, raised again to ≥ $10 in 1995); 1997: $0.0625 for AMEX stocks ≥ $0.25.
 
21991: $0.0625 for AMEX stocks ≥ $0.25 and < $1 (raised to < $5 in 1992).
 
31991: $0.03125 for AMEX stocks < $0.25.
 

The trouble with small tick sizes 59 



  

 

 
 

 
 

 

 
 

 

  

Appendix E
 

IPO economics 

Today’s investment banks lose money supporting small IPOs in the aftermarket and, as a result, provide very little “real” support 

Small IPOs used to be very lucrative transactions for banks Pre-decimalization: Banks could make an additional 2x their IPO fees 
through aftermarket commissions and trading

1 bookrunner + 1 co-manager, 60/40 economics 
Bookrunner’s aftermarket revenue $1,680,000

Gross proceeds (GP) $25,000,000 
Co-manager’s aftermarket revenue $1,120,000

Gross spread (GS, 7%) $1,750,000 
Bookrunner's net IPO-related revenue $2,520,000

Total management fee (MF, 20% of GS) $350,000 
Co-managers's net IPO-related revenue $1,680,000

Total selling concessions (SC, 60% of GS) $1,050,000 

Bookrunner’s IPO fee (MF + SC) $840,000 
Post-decimalization: Banks lose money in the aftermarket on smallCo-manager’s IPO fee (MF + SC) $560,000 
IPOs, giving back at least 10% of their IPO fees, resulting in a 70% 
decline in revenue 

Bookrunner’s aftermarket loss $(84,000) 

Co-manager’s aftermarket loss $(56,000) 

Bookrunner's net IPO-related revenue $756,000 

Co-managers's net IPO-related revenue $504,000 

Given the crowded covers and Net IPO-related revenue 

2 bookrunners + 3 co-managers, 40/30/15/10/5 economics 

Gross proceeds (GP) $25,000,000 

expected aftermarket losses, 
small IPOs are not nearly as 
lucrative as they used to be 

Bookrunner A 

Bookrunner B 

$504,000 

$378,000 

Gross spread (GS, 7%) $1,750,000 Co-manager C $189,000 

Total management fee (MF, 20% of GS) $350,000 Co-manager D $126,000 

Total selling concessions (SC, 60% of GS) $1,050,000 Co-manager E $63,000 

Bookrunner A’s IPO fee (MF+SC) $560,000 

Bookrunner B’s IPO fee (MF+SC) $420,000 
Deal sizes must be 5x–7x Proceeds required to duplicate 

Co-manager C’s IPO fee (MF+SC) $210,000 larger in order for bookrunners pre-decimalization revenue 

Co-manager D’s IPO fee (MF+SC) 

Co-manager E’s IPO fee (MF + SC) 

$140,000 

$70,000 

to generate the same level 
of revenue as they did pre-
decimalization 

Bookrunner A 

Bookrunner B 

$125,000,000 

$166,666,667 

Today’s small IPOs look very different 

Source: Capital Markets Advisory Partners LLC. 

60 The trouble with small tick sizes 



   

 
 
 

Appendix F
 

IPO success rates 
There is a secular decline in IPO success rates that is independent of the Sarbanes-Oxley Act. Companies going public today are 
failing at increasingly higher rates as more deals are being withdrawn, priced below their initial filing range and trading below their 
offer price. This decline in IPO success rates has been exacerbated by the steady degradation in equity sales coverage of institutional 
and retail investors that is a reaction to the erosion in bankable spreads and commissions. 

Success rate of all IPOs 

50% 

100% 

70% 

60% 

80% 

90% 

40% 

20% 

30% 

10% 

0% 

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Source: Capital Markets Advisory Partners LLC.
 
Includes only corporate issuers, excluding funds, MLPs, SPACs and REITs.
 
Based on the average success rate of the last 30 filed deals, up to one year ago. A successful deal is defined as: 1) priced within one year of filing, 2) priced at or above the low end of the 

filing range, and 3) trading at or above issue price one month after pricing.
 

The trouble with small tick sizes 61 



  

Success rate of IPOs with proceeds greater than $500 million 

50% 

100% 

70% 

60% 

80% 

90% 

40% 

20% 

30% 

10% 

0% 

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
 

Source: Capital Markets Advisory Partners LLC.
 
Includes only corporate issuers, excluding funds, MLPs, SPACs and REITs.
 
Based on the average success rate of the last 30 filed deals, up to one year ago. A successful deal is defined as: 1) priced within one year of filing, 2) priced at or above the low end 

of the filing range, and 3) trading at or above issue price one month after pricing.
 

62 The trouble with small tick sizes 



   

Success rate of IPOs maintaining issue price one month after going public 

50% 

100% 

70% 

60% 

80% 

90% 

40% 

20% 

30% 

10% 

0% 

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
 

Source: Capital Markets Advisory Partners LLC.
 
Includes only corporate issuers, excluding funds, MLPs, SPACs and REITs.
 
Based on the average success rate of the last 30 filed deals, up to one month ago. A successful deal is defined as trading at or above issue price one month after pricing.
 

The trouble with small tick sizes 63
 



  

	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	
	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	 	 	

 

	 	 	 	 	 	 	 	 	

 

	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	

References
 

Hee-Joon Ahn, Jun Cai and Yan Leung Cheung, “Price clustering on the limit-order book: Evidence from the stock exchange of
 
Hong Kong” (2005)
 

Michael Aitken and Carole Comerton-Forde, “Do reductions in tick sizes influence liquidity?” (2005)
 

David E. Allen and Josephine Sudiman, “Does tick size change improve liquidity provision? Evidence from the Indonesia
 
stock exchange” (2009)
 

James J. Angel, “Tick size, share prices, and stock splits” (1997)
 

Hendrik Bessembinder, “Trade execution costs and market quality after decimalization” (2003)
 

Ekkehart Boehmer, Kingsley Fong and Julie Wu, “International evidence on algorithmic trading” (2012)
 

David Bourghelle and Fany Declerck, “Why markets should not necessarily reduce the tick size” (2002)
 

Bidisha Chakrabarty and Kee H. Chung, “Can sub-penny pricing reduce trading costs?” (2008)
 

Sugato Chakravarty, Stephen P. Harris and Robert A. Wood, “Decimal trading and market impact” (2001)
 

K. C. Chan and Chuan-Yang Hwang, “The impact of tick size on the quality of a pure order-driven market: evidence from the stock
 
exchange of Hong Kong” (2001)
 

Kee H. Chung, Chairat Chuwonganant and D. Timothy McCormick, “Order preferencing and market quality on NASDAQ before
 
and after decimalization” (2003)
 

Kee H. Chung, Kenneth A. Kim and Pattanaporn Kitsabunnarat, “Liquidity and quote clustering in a market with multiple tick sizes” 

(2005)
 

David Easley, Marcos M. López de Prado and Maureen O’Hara, “The microstructure of the ‘flash crash’: Flow toxicity, liquidity
 
crashes and the probability of informed trading” (2010)
 

Jared Egginton, Bonnie F. Van Ness and Robert A. Van Ness, “Quote stuffing” (2012)
 

Federation of European Securities Exchanges, www.fese.be/en/?inc=cat&id=34, “Tick size regimes” (2012)
 

Financial Times, “LSE bows to tick size pressure as war erupts” (2009)
 

Michael A. Goldstein and Kenneth A. Kavajecz, “Eighths, sixteenths and market depth: Changes in tick size and liquidity provision
 
on the NYSE” (1998)
 

Terrence Hendershott, Charles M. Jones and Albert J. Menkveld, “Does algorithmic trading improve liquidity?” (2011)
 

64 The trouble with small tick sizes 

www.fese.be/en/?inc=cat&id=34


   

	 	 	 	 	 	

 
	 	 	 	 	

 

	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	  

	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	

Roger D. Huang and Hans R. Stoll, “Tick size, bid-ask spreads and market structure” (2001)
 

Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues, “Recommendations regarding regulatory responses to the
 
market events of May 6, 2010” (2011)
 

Soohun Kim and Dermot Murphy, “The impact of high-frequency trading on stock market liquidity measures” (2011)
 

Andrei Kirilenko, Albert S. Kyle, Mehrdad Samadi and Tugkan Tuzun, “The flash crash: The impact of high-frequency trading on an
 
electronic market” (2011)
 

Oliver Linton and Maureen O’Hara, “The impact of computer trading on liquidity, price efficiency/discovery and transaction costs” (2011)
 

Daan Struyven, “The Battle between the Bombay Stock Exchange and the National Stock Exchange” (2008)
 

The Trade News, “NYSE Euronext tick size move ‘bad’ for market structure” (2011)
 

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The trouble with small tick sizes 65 



  

 
 

 
 

 

 
 

 
 
 

 
 

 
 

 
 
 
 

 

 
 

 

 

 
 

 
 

 

 

About the authors
 

David Weild 

David Weild oversees Capital Markets at Grant Thornton LLP, providing strategies 
and insight into today’s global capital markets. Weild is also the chairman and CEO 
of Capital Markets Advisory Partners, a firm that specializes in providing equity 
capital markets advice to issuers. He is a co-author of Market structure is causing 
the IPO crisis — and more and A wake-up call for America, and is a frequent 
resource to the financial news media on issues relevant to the capital markets. 

Weild is the former vice chairman and executive committee member of The 
NASDAQ Stock Market, with line responsibility for the global listings businesses. 
Prior to NASDAQ, he spent 14 years in a variety of senior investment banking and 
equity capital markets roles at Prudential Securities. He oversaw more than 1,000 
initial public offerings, follow-on offerings and convertible transactions, and was an 
innovator in new issue systems and transaction structures. 

Weild earned an MBA from the Stern School of Business and a BA from Wesleyan 
University. He studied on exchange at The Sorbonne, École des Haute Études 
Commerciales and the Stockholm School of Economics. He holds FINRA Series 7, 
24, 63, 79 and 99 licenses. 

Contact information 
Grant Thornton LLP, Capital Markets 
T 212.542.9979 
E [email protected] 

Edward Kim 

Edward Kim is a capital markets senior adviser at Grant Thornton LLP, providing 
strategies and insight into today’s global capital markets, and is co-founder and 
managing director at Capital Markets Advisory Partners, the firm that specializes 
in providing equity capital markets advice to issuers. He is a co-author of Market 
structure is causing the IPO crisis — and more and A wake-up call for America, 
and often provides the financial news media with commentary and analysis on 
capital markets trends. 

Kim is the former head of product development at The NASDAQ Stock Market. 
Prior to NASDAQ, he worked in equity research at Robertson Stephens, equity 
trading at Lehman Brothers, and investment banking and equity syndicate at 
Prudential Securities. 

Kim earned a BS in materials science and engineering from the Massachusetts 
Institute of Technology and holds FINRA Series 7, 79 and 99 licenses. 

Contact information 
Grant Thornton LLP, Capital Markets 
T 702.823.1259 
E [email protected] 

Lisa Newport 

Lisa Newport is a capital markets director at Grant Thornton LLP, providing 
strategies and insights into today’s global capital markets. She specializes in 
financial analysis and leads the group’s quantitative and qualitative research. 

Prior to joining Grant Thornton, Newport spent more than five years with the Board 
of Governors of the Federal Reserve System, focusing on U.S. policy initiatives 
and operational risk management. She also spent more than seven years at The 
NASDAQ Stock Market, specializing in financial industry research. 

Newport earned an MBA from the Massachusetts Institute of Technology and a BA 
in mathematics from Mills College. 

Contact information 
Grant Thornton LLP, Capital Markets 
T 202.861.4114 
E [email protected] 

66 The trouble with small tick sizes 

mailto:[email protected]
mailto:[email protected]
mailto:[email protected]




 
 

 

 
 

 
 

 
 

 
 

 

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