The Ins and Outs of the SEC’s Tick Pilot Program

Getting into the weeds with day trading can be fun for some, excruciatingly boring for others. For me and the traders at Warrior Trading, it is fascinating. All the little rules and loopholes and math that affect how money moves around the globe every day. It is really pretty crazy when you think about it.

There are a whole bunch of SEC rules and regulations that affect how much profit a day trader can make and how quickly he or she can make it. Understanding these rules requires quite a bit of reading and studying. But the payoff is great. It will give you insight into how markets works and how you can make money from day trading in those markets.

Let me tell you about tick size, for one thing. Basically, before April 2001, all stocks on the U.S. exchanges were traded in fractions of either ⅛ or 1/16. What that meant was that stocks trading at ⅛ spreads had a 12.5-cent spread, while those at 1/16 had a 6.25-cent spread. Not very conducive to computer trading. On April 9, 2001, all stocks above $1.00 began to trade with 1-cent increments. Which means that stocks that used to have 8 price points or 16 price points now had 100 different price points. Decimalization was upon us.

Not everyone was happy about it. Lots of market watchers and traders complained that the move forced people away from small-cap stocks to large-cap stocks and long-term holds because the spreads on small-cap stocks got so small.

What does that mean for today? Well, the SEC has picked 1200 stocks to participate in a tick pilot program, where in October 2016, all those stocks began trading at a minimum of 5-cent ticks. The spreads got a little bigger and the theory is that investment banks might get back into the game of actively making markets on these stocks, which would improve liquidity.

The first responses to the program have noted that it has reduced volatility in the small-cap markets. Which can be good for large investment banks that want to get involved, but, maybe not so good for day traders that make money off big daily movers in the markets.

To understand more detail about the tick pilot program and the 5 cent tick pilot, go to http://warriortrading.com/5-cent-tick-size-pilot-program/. It has a long history decimalization, the reactions to it at the time and the run-up in this decade to the SEC studying a tick pilot program and implementing a solution.

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