The Securities and Exchange Commission (SEC) approved a proposal for a two-year pilot program testing wider spreads on smaller stocks. The pilot program will mandate bid-ask spreads (the difference in price between what buyers and sellers are willing to transact at) of five cents. The proposal was made by several national exchanges and the Financial Regulatory Authority (FINRA).

The pilot will begin by May 6, 2016, and will last for two years. The purpose will be to determine whether wider spreads improve trading of small stocks by attracting more market makers and resulting in more information about those stocks being available.

Stocks selected for inclusion in the program will have market capitalizations of $3 billion or less. They will also be exchange listed, have a share price of at least $2, not have a closing price of less than $1.50 during a measurement period leading up to the pilot program and have an average daily trading volume of one million shares or less. A list of the stocks included in the pilot program and the test groups they are classified in will be posted daily by the national exchanges.

Selected stocks will be placed into one of three “test groups” or a “control group.” Stocks in the control group will trade normally and can be quoted and traded at any currently permitted price increment. Each of the three test groups will consist of 400 securities, with each group having increasingly restrictive rules, as follows.

Test Group 1: Mandates quotations in five-cent increments (e.g., a bid price of $4.25 and an ask price of $4.30). Stocks in this group can trade at any price increment that is currently permitted.
Test Group 2: Stocks will trade at five-cent minimum increments, but can also trade at the midpoint of the bid and ask spread, be offered to individual investors at a price that is at least more than $0.005 better than the current best bid and ask price, or can trade at increments of less than a nickel if a negotiated trade is made.
Test Group 3: Stocks must trade at the quoted price with the exception of specific circumstances—including a $0.005 improvement for individual investors.

Source: “SEC Approves Pilot Program to Assess Tick Size Impact for Smaller Companies,” Securities and Exchange Commission, May 6, 2015.