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SEC Tick Pilot Will Focus on Liquidity, Not IPOs

NEW YORK (The Deal) -- A top Securities and Exchange Commission official said Friday that a pilot program to use a wider tick increment than the current one-penny spread to price securities may be short-lived, perhaps six months, and will focus on boosting liquidity, a move that will upset proponents who are seeking a long-term effort that they believe is necessary to encourage more initial public offerings.

"Most serious observers realize that any pilot of this type is not going to have any discernible impact on the number of IPOs or the amount of [analyst] research that is produced," John Ramsay, the outgoing director of the SEC's division of markets and trading, told reporters on the sidelines of the annual "SEC Speaks" conference. "That is not what we would be looking at. We would be looking at liquidity characteristics: Does that mean there are more firms willing to participate and create liquidity and does that mean that there is a better market for more small company shares. That we think is a legitimate thing to look at."

Proponents say widening trading increments - to 5 cents or 10 cents - would increase the visibility of small publicly traded companies by giving small boutique investment banks the incentive to trade them more. All of this, they said, would kick some life into illiquid small capitalization companies and the generally lackluster IPO market for small-cap stocks. However, backers of a pilot program are expected to be disappointed by a shorter duration because they contend that it would not provide an incentive for boutique investment banks to hire more research analysts and invest in technology that they believe would shine a spotlight on small illiquid companies, a move that they believe would be a major driver in encouraging IPOs. Ramsay added that he thought that "in a six-month time-frame" the SEC could "draw some kind of reasonable inferences as to what the impact" would be.

Ramsay's comments come after SEC Chairwoman Mary Jo White said earlier Friday that she will push ahead with a pilot program to use a wider tick increment, without providing many details. "It's on the front-burner," she told reporters.

The SEC has received conflicting recommendations from its advisory committees on the wisdom of a pilot program. An SEC investor advisory committee recommended against the agency conducting one shortly before the House of Representatives nearly unanimously voted Feb. 11 to approve legislation that would create a five-year pilot program. Last year an SEC small business advisory committee voted in favor of the idea, recommending that the agency widen the tick spreads for small publicly traded companies, without conducting a pilot program at all. The committee said that this would be the only way to drive liquidity in small public companies and encourage IPOs.

However, opponents on the investor advisory committee said there is little evidence that an increase in tick size - the minimum pricing increment that can be used to trade securities - would boost IPOs and hike independent research. Meanwhile, they said they think it will raise costs for retail investors.

The leading opponent of wider tick increments, Steven Wallman, a former SEC commissioner who chairs a market structure investor advisory subcommittee, told The Daily Deal that there is no evidence that wider tick spreads would encourage IPOs and more research coverage of small illiquid companies. He pointed to the near unanimous House vote, arguing that he can "understand the pressure" the SEC is under to do something. Now, he added, the SEC's focus is on whether it would increase liquidity, which he contends doesn't require a long pilot program.

"It doesn't take years to see whether there is more liquidity [with a pilot program]," he said.

Wallman, was a commissioner at the SEC that voted to back a 2001 SEC rule known as "decimalization," where the spread size between bids and offers on stock exchanges was reduced from 25 cents to a one-cent minimum tick.

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