Tick Size Pilot 2016: What Wider Spreads Actually Did

Key Takeaways

• The tick size pilot 2016 divided roughly 1,200 small-cap stocks into three test groups with five-cent minimum ticks, plus a one-cent control group.
• SEC DERA data showed displayed depth increased in test groups, but effective spreads widened and typical investor transaction costs rose across all three groups.
• A common mistake is treating the pilot as a simple win or loss; results were mixed and highly dependent on order size, group assignment, and the Trade-At provision.
• The pilot's mixed findings directly informed the SEC's 2024 tick size and access fee amendments, making it essential context for current market structure debates.

What It Is

In May 2014, the SEC ordered the national exchanges and FINRA to develop a National Market System Plan to test wider tick sizes for small-capitalization stocks. The stated goal was to study whether thicker tick sizes would improve market quality and capital formation for smaller issuers, particularly liquidity provision and analyst coverage.

The pilot ran from October 3, 2016 through October 2018 (data collection ended September 28, 2018). It assigned roughly 1,200 small-cap stocks (market cap under $3 billion, share price above $2, average daily volume under one million shares) into three test groups plus a control:

• Control group. Continued under existing one-cent ticks. About 1,400 stocks.
• Test Group 1. Quoted in five-cent increments; could trade at any current increment. About 400 stocks.
• Test Group 2. Quoted and traded only in five-cent increments, with limited exceptions for midpoint executions. About 400 stocks.
• Test Group 3. Same as Group 2, plus a trade-at provision that prevented price-matching off-exchange execution unless the off-exchange venue offered material price improvement. About 400 stocks.

The Intuition

Tick size matters because it sets a floor on the bid-ask spread and a ceiling on the depth that can sit at any single price level. Wider ticks force a wider minimum spread, which mechanically increases per-share market-maker revenue. The hope was that those richer economics would attract more passive liquidity to small-cap names, improving execution quality and supporting analyst coverage.

The opposing concern was that wider ticks would simply make trading more expensive for end investors without producing the secondary benefits, especially if depth did not actually improve in proportion to the wider spread.

How It Worked

Pilot mechanics applied at the order-entry and quote level on every US equity venue. For Group 1, 2, and 3 stocks, displayed quotes had to be in five-cent multiples (e.g. 12.00, 12.05, 12.10, but never 12.01 to 12.04). Trading rules for each group:

Group 1: Quote in 5c, trade in any increment (including sub-pennies and midpoints)
Group 2: Quote in 5c, trade in 5c (with retail price improvement and midpoint exceptions)
Group 3: Same as Group 2 + Trade-At rule (off-exchange must improve by 5c or trade at displayed quote)

The Trade-At provision in Group 3 was the most controversial. It prevented off-exchange venues (dark pools, internalisers, broker-dealers) from matching the displayed price; they had to either offer at least one tick of price improvement or route to the displayed venue. The intent was to redirect flow back to lit markets.

Worked Example

A pre-pilot small-cap stock quoted 12.01 / 12.02 with 500 shares displayed on each side. After pilot launch in Group 2:

Pre-pilot:    bid 12.01 ask 12.02   spread 1c
Group 2:      bid 12.00 ask 12.05   spread 5c (legal quote levels)
                                    OR
              bid 12.05 ask 12.10   etc.

Spreads widened mechanically. Empirical results from the SEC's Division of Economic and Risk Analysis (DERA) working paper and the joint participants' assessment found that for Test Group 1, displayed depth at the inside generally increased, but quoted spreads also widened, leaving total trading costs for typical investor sizes broadly higher. For Group 3 (with the Trade-At rule), more volume migrated to lit exchanges, but overall transaction costs again increased, with little measurable improvement in market-maker participation, IPO activity, or analyst coverage of the affected stocks. The Commission allowed the pilot to expire in 2018 rather than make any of the changes permanent.

Common Mistakes

1. Treating the pilot as a clean win or clean loss. The SEC's own assessment found mixed effects: more displayed depth in some groups but wider effective spreads, more lit-market volume in Group 3 but higher cost to investors. The pilot data is a rich resource precisely because the answer is not one-sided.

2. Assuming wider ticks always help market makers. Wider ticks raise per-share spread revenue but also widen the standoff distance between bid and ask, which can reduce inside-quote competition and produce stickier spreads. The empirical research found no material increase in dedicated market-maker presence in the pilot stocks.

3. Ignoring the Trade-At dimension. The most aggressive design feature was Group 3's Trade-At provision, not the wider tick itself. Conflating "wider ticks" with "Trade-At rule" muddies the policy debate. Each is a distinct lever.

4. Generalising from small-cap data to the whole market. The pilot universe was deliberately limited to small-cap, lower-volume stocks. Findings do not extrapolate cleanly to large-cap names already trading at minimum tick.

5. Forgetting the asymmetry with high-priced stocks. US tick size is fixed at one cent regardless of share price. A $10 stock has a 10 basis-point minimum tick; a $1,000 stock has a 0.01 bp minimum tick. The pilot did not address this dimension, which became the focus of the SEC's later Rule 612 amendments and the 2024 tick-size and access-fee reforms.

Frequently Asked Questions

Q: What is the tick size pilot 2016 in simple terms? The SEC ran a two-year experiment from October 2016 to September 2018 that forced about 1,200 small-cap stocks to quote in five-cent increments instead of one cent. The goal was to test whether wider spreads would attract more liquidity and analyst coverage to smaller companies.

Q: How does the tick size pilot affect investment decisions? The pilot's findings matter for anyone trading small-cap stocks: wider ticks mean higher transaction costs even when displayed depth increases. The results also influence ongoing SEC rulemaking on tick sizes and access fees, so understanding the pilot helps investors interpret future market structure changes.

Q: What is a real-world example from the tick size pilot? A small-cap stock that previously quoted 12.01 bid / 12.02 ask (one-cent spread) was forced under Group 2 to quote at five-cent increments, moving to something like 12.00 / 12.05. The spread mechanically quintupled, raising round-trip cost from two cents to ten cents per share even before any improvement in depth.

Q: How can investors use the tick size pilot findings effectively? Treat the pilot data as a benchmark when evaluating liquidity in small-cap names. If a stock shows thin displayed depth at one-cent ticks, that is partly a structural consequence of the post-2001 tick regime, not just company-specific illiquidity. The SEC assessment papers are public and worth reading for anyone evaluating small-cap execution quality.

Q: How is the tick size pilot different from decimalization in 2001? Decimalization shrank the minimum tick from 6.25 cents to one cent for the entire market. The tick size pilot ran in the opposite direction, testing whether wider ticks could restore liquidity for a subset of small-cap stocks. The two events bracket the range of tick-size policy and show the trade-offs in both directions.

Sources

1. SEC. "Tick Size Pilot Program Overview." https://www.sec.gov/data-research/tick-size-pilot-program
2. SEC, FINRA, and the Participating Exchanges. "Assessment of the Plan to Implement a Tick Size Pilot Program." https://www.sec.gov/files/TICK%20PILOT%20ASSESSMENT%20FINAL%20Aug%202.pdf
3. SEC Division of Economic and Risk Analysis. "Tick Size Pilot Plan and Market Quality." https://www.sec.gov/files/dera_wp_tick_size-market_quality.pdf
4. FINRA. "Tick Size Pilot Program." https://www.finra.org/rules-guidance/key-topics/tick-size-pilot-program

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.