Today I am going to give you more information on the “Tick Size Pilot Program (TSPP)” but before you tune out because you don’t trade small cap, I would like to suggest you continue to read. Anything you can learn about the stock market and how it works is beneficial to you.
Tick Size Pilot Program (TSPP)
By now, most people who actively trade small-cap stocks have run into pricing for certain issues that reflect an increment of 5 cents. This is the result of the Oct. 3 implementation of a two-year plan called the “Tick Size Pilot Program (TSPP).”
This plan was initiated by the SEC with the goal of improving liquidity of small cap securities. Details of the plan can be complicated. Our goal is simply to know how it affects us and the strategies we trade.
Law of Unintended Consequences
Before delving into that goal, it is important to note the concept in social science called “unintended consequences.” In fact, the need for improving liquidity is a result of unintended consequences of decimalization in 2001 and regulatory changes in 2003. Those both had the net effect of reduced liquidity in small-cap stocks. Expect that the TSPP program will also have unintended consequences, and may change over the next two years!
Let’s get some details out of the way
One of the details that we must be aware of, though, is how the program works for the subset of stocks that were chosen for participation.
Group membership can actually change daily based on certain criteria. Each night the FINRA (Financial Industry Regulatory Authority) publishs a list of historical changes. This list will become important to our approach when dealing with TSPP that we will detail shortly.
For our purposes, all we really need to be concerned with is whether a stock is in group G1, G2, or G3 and trades with a 5 cent increment.
This means, as traders, we are primarily concerned with answering two questions –
- How will we get the price target (limit) with the correct increment for trades to enter?
- How can we model various systems and how they would have performed in the past under this program so that we can project the impact of TSPP into the future?
We’ll answer those two questions in the next blog post called Pessimum or Optimism
Check our out the Performance Matrix for our algorithms and sign up today.