Tick Size Pilot Program
The Tick Size Pilot Program was a two-year SEC-mandated study conducted from October 2016 to September 2018 that tested whether widening the minimum price increment to five cents for a selected group of smaller-capitalization U.S. stocks would improve liquidity, analyst coverage, and market quality compared to the standard one-cent tick size.
The minimum price increment at which stocks trade — the tick size — has a profound effect on market structure. A smaller tick encourages tighter bid-ask spreads but can create a fragmented order book in which market makers offer only small displayed quantities because the cost of maintaining priority is low. Proponents of wider ticks for small-cap stocks argued that a five-cent minimum increment would make market-making more economically attractive, incentivize brokers to provide research coverage of smaller companies, and ultimately improve capital formation for issuers too small to attract adequate institutional attention under penny increments.
The SEC designed the pilot under the JOBS Act of 2012, which directed the Commission to study whether tick size affected small-cap liquidity. The pilot divided approximately 1,200 small-cap stocks with market capitalizations below three billion dollars and average daily trading volume below one million shares into three test groups and a control group. Test Group 1 quoted in five-cent increments but could trade at any price. Test Group 2 quoted and traded in five-cent increments with limited exceptions. Test Group 3 applied the same five-cent quoting and trading rules plus a trade-at requirement prohibiting off-exchange executions unless they offered meaningful price improvement over the displayed quote.
The results were largely unfavorable for the wider-tick hypothesis. Academic analyses and the SEC and FINRA joint assessment published in 2018 found that five-cent increments increased quoted spreads and imposed higher transaction costs on investors without producing the expected improvement in market depth, analyst coverage, or trading volume. Some studies found modest increases in displayed liquidity at the inside quote but no statistically significant improvement in realized spreads for institutional-sized orders. The trade-at component redirected some volume to lit venues but did not meaningfully enhance price discovery.
Based on the pilot results, the SEC did not proceed with a broader implementation of wider tick sizes for small-cap stocks. However, the pilot generated a rich dataset that has informed ongoing academic research into tick size effects, the economics of market-making, and the relationship between execution costs and equity research coverage. The findings reinforced the complexity of tick size as a policy instrument: changes that benefit liquidity providers may simultaneously increase costs for investors, creating a difficult trade-off for regulators.