The SEC released a study on the effect of the shift to decimal pricing of securities on the number of IPOs and on liquidity of small and middle capitalization company securities. The study was required by the JOBS Act.
On July 20, 2012, the SEC released a study required by Section 106 of the JOBS Act examining the effects of decimalization on initial public offerings (IPOs) and liquidity of small and middle capitalization company securities. Decimalization was the shift, in the early 2000s, to US public equity securities being quoted and traded in one cent increments (or tick-sizes) instead of larger tick sizes expressed as a fraction.Close speedread
On July 20, 2012, the SEC (www.practicallaw.com/9-382-3806) released a study required by Section 106 of the JOBS Act (www.practicallaw.com/2-518-7869) examining the effects of decimalization on initial public offerings (www.practicallaw.com/2-382-3541)(IPOs) and liquidity of small and middle capitalization company securities. Decimalization was the shift, in the early 2000s, to US public equity securities being quoted and traded in one cent increments (or tick-sizes) instead of larger tick sizes expressed as a fraction. The study examines:
Empirical studies on the topic of tick size and decimalization.
Materials from SEC advisory committee discussions on the effects of market structure on smaller company IPOs.
A survey of tick-size conventions in non-US markets.
The study explains that, just before the April 2001 adoption of decimal pricing, US publicly traded equity securities were typically quoted and traded at a minimum tick size of 1/16th of a dollar. With the transition to decimal pricing, the minimum tick size became one cent. Academic papers and other commentators have suggested that the smaller minimum tick size has resulted in fewer opportunities for small and mid-cap companies to raise capital in public markets. Proponents of this view have cited several theoretical explanations for this, including:
Because decimalization generally reduced the "spread" between the bid and ask price for securities, it reduced the profitability to securities firms of making a market in securities. This was especially true for securities with a smaller market capitalization. This in turn is thought to have discouraged securities firms from providing analyst coverage of smaller companies, which then reduced demand for their stock.
Decimalization has been associated with market structure changes favoring short-term trading strategies over long-term fundamental strategies. This has further reduced demand for smaller company stocks that are less liquid.
Key findings of the study include:
After decimalization, the reduction in relative spreads may have reduced securities firms' incentives to promote stocks by providing analyst coverage.
While a sharp decline in smaller company IPOs coincided with the shift to decimal pricing, several other economic events happened during this period. This makes it difficult to identify the role decimalization played.
Section 106 of the JOBS Act also directs the SEC to determine whether the securities of emerging growth companies (www.practicallaw.com/3-518-8137) (EGCs) should be quoted and traded in tick sizes larger than one cent. The study recommends that the SEC not proceed to increase EGC tick size. Instead, the study recommends that the SEC take additional steps, including soliciting input from the public, before acting.
For more information about Title I of the JOBS Act, see Practice Note, JOBS Act: On-ramp to the Capital Markets for Emerging Growth Companies Summary (www.practicallaw.com/1-518-7351).