SEC Weighs Bringing Back Fractions in Stock Prices
Smaller spreads was supposed to make things better, but it took regulators some 10 years to understand that by decreasing the spread, the market would get less efficient, at least if you trade more than 100 shares. We have always argued that by decreasing the spread, many functions of the “natural” market maker would dissapear, as there is no spread to motivate the trader being in the market, providing the nescessary liquidity. We are not arguing for the old times to return. Technological advances are great, but only if the market benefits. The development over the past years, with Broken Markets, is now slowly being acknowledged by the regulators. Irrespective of what the academics tell you, liquidity is not better, trading impact is higher etc. One of our suggestions is starting off by applying a spread in relations to the company market cap. There are many more suggestions, but first let’s see if the SEC finally starts realising the market is broken. From WSJ.
For some stock prices, the new math might look a lot like the old math: Regulators are thinking about bringing back the fraction.
The move would at least partly undo an 11-year-old rule that replaced fractions of a dollar in stock prices, like 1/8 and 1/16, with pennies. The idea of that change was to trim investors’ trading costs: One-cent increments can lead to narrower gaps between the prices at which brokers buy and sell shares—potentially reducing their opportunity to shave off profits.
Those championing the fraction’s return say it would spur securities firms to buy and sell more shares of some companies by making it more profitable for them to do so. Opponents say fractions would increase trading costs for investors with little or no benefit to companies.
Discussions are still in the early stages and it is unclear what the Securities and Exchange Commission will ultimately decide. Furthermore, any change would affect only some smaller companies. “People are increasingly raising this idea with us directly,” SEC Chairman Mary Schapiro said in an interview. “We will look at it, but there are obviously trade-offs.”
Full article here.