[video] Battle Rages Over Pilot Program For Wider 'Tick Spreads'

NEW YORK (The Deal) -- A Securities and Exchange Commission investor advisory panel is expected to urge the agency not to move forward with a pilot program to experiment with widening the one-penny increment currently used to price securities, according to three people familiar with the situation.

Already two subcommittees of the SEC's investor advisory panel, whose suggestions are not binding with the SEC but nevertheless carry significant weight with the agency's commissioners, have voted against the program. The vote of the full panel, set for Jan. 31, would contradict one made an SEC advisory committee on small and emerging companies in March. The small business panel joined other groups in urging the agency to widen trading increments - at 5 cents or 10 cents - a move that they believe would 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 and illiquid small public companies. A tick is the minimum pricing increment that can be used to trade securities.

All of this would kick some life into illiquid small capitalization companies and the generally lackluster IPO market for small-cap stocks, they contend.

However, the two investor advisory subcommittees opposed a pilot program, arguing that they "see little evidence" that an increase in tick size would increase research and market making activities. The investor subcommittees added that if tick sizes are increased "additional profits will simply be retained by trading centers or shared with firms that send them order flow, rather than being directed into increased research or other activities to benefit capital formation."

Indicating that they believe the SEC may launch a pilot program anyway, the subcommittees also issued a separate recommendation suggesting that if the commission goes forward with such a pilot program that it be "designed with a tight timeframe" and a guaranteed sunset unless benefits are proven to outweigh the costs. This suggestion is also expected to be approved by the committee, people familiar with the panel said.

The recommendations come as a wider tick pilot program has gained momentum. SEC Chairman Mary Jo White has said recently that the agency is considering a wider tick spread pilot program but has yet to announce the details of its length or how it would look. Also, the House Financial Services Committee in November unanimously, by an unusual bipartisan vote of 57-0, approved a wider-tick spread pilot program bill introduced by Rep. Sean Duffy, R-Wis.

The recommendations issued by the subcommittees also raised serious concerns with a small business group known as the Equity Capital Formation Task Force, which worries that a pilot program with a 'tight timeframe" would discourage boutique investment banks from spending money on new technology or the hiring of sales people that would inject liquidity in these securities because they would worry that the program would shut down too soon. The ECFTF, which is made up of officials who work for boutique investment banks, exchanges, trading firms and lobbying shops, sent a letter Wednesday to the advisory panel arguing that opposing any pilot program is a "do nothing approach" that is not a viable alternative to solve the core problem, which includes a "substantial decline in small company IPOs over the past decade and a half." This group has led the way in advocating for an SEC pilot program that would widen tick increments.