NEW YORK (TheStreet) -- Securities and Exchange Commission Chairwoman Mary Jo White said this week that she was "quite supportive" of a pilot program that could kick some life into the generally lackluster initial public offering market for small capitalization companies/
She added that stock exchanges and the SEC staff should work together to develop a plan for it.
White told reporters after speaking before a Security Traders Association conference in Washington that she has instructed the SEC staff to "move forward" with efforts to work with exchanges, including Nasdaq and the NYSE Euronext, as the exchanges develop a proposal they will submit to the SEC for a pilot program that would allow small and mid-sized companies to widen the current one-penny increment that is used to price securities.
Backers of the measure argue that wider trading increments - at 5 cents or 10 cents - will help increase the visibility of small publicly traded companies by giving small boutique investment banks the incentive to trade them more and invest in hiring stock salesmen and analysts who would shine a spotlight on otherwise ignored small public companies. Smaller investment houses would be more interested in making markets in these thinly traded stocks because they would trade at higher spreads, giving market makers a better chance of profiting when trades do happen.
Supporters contend the approach would give many private companies more incentive to carry out IPOs. Many private companies are worried that going public would come with regulatory costs but no benefits because their security would remain illiquid and unknown. However, critics of wider tick spreads, including former SEC Chairman Arthur Levitt, argue that narrow tick spreads have made trading cheaper for retail and institutional investors.
White told reporters that it is her expectation that the SEC staff will at some point issue a recommendation on a pilot program. She added that the "expected course" is for exchanges to submit a plan to the SEC on a pilot program before the SEC moves forward. The commission would be required to approve any pilot, she added.
A person close to the SEC told The Deal that one of the issues the agency and exchanges are grappling with is about exactly how long a pilot program should last and whether larger corporations with better liquidity should be included too so that trading in their shares could be compared to trading in smaller companies.
He added that the pilot also might give the SEC a chance to find out if wider tick spreads encourage more analysts to follow and write research reports on small public companies. But finding that out could take "years and years and years." Alternatively, a shorter pilot could be sufficient to discover whether wider tick spreads drives more liquidity, he said. The official added that exchanges would collectively submit a rule proposal that would need to be approved by the commission within 240 days.
--By Ronald D. Orol In Washington