Tick Pilot Program Impact

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Includes: BWLD, DAVE, HMSY, IBCP
by: Andrew Feinstein
Summary

Tick Pilot overview.

Effects of the Tick Pilot Program on small-cap liquidity.

Impact on the retail investor.

Expected changes to the pilot.

The Tick Pilot Program was an SEC-implemented program aimed at increasing the liquidity of small-cap companies. It was launched in October of 2016 and is planned to last two years. What it did was increase the minimum spread between the bid and the ask price to $.05 on certain stocks in hopes of pooling liquidity around the $.05 metric. The pilot consisted of 3 different groups with three slightly different characteristics, centered around the main idea, in hopes of finding the most successful future implementation. See this article for more information on the actual pilot.

After thorough analysis, it appears that there has not been much success with the Tick Pilot Program. While liquidity is pooling at the $.05 increments, the average daily volume of these trades has not changed, therefore this is an indication that liquidity has remained relatively stable. Volatility has also remained stable throughout this period showing that the stocks are not seeing much activity. As most traders have described it, the pilot has only created a headache in terms of needing to place limit orders at the $.05 metric. We are still waiting for the official release of data from the SEC due in April of 2018.

Investing in these securities can be difficult as they are not traded as frequently as larger cap securities and some of them are very obscure. Further, as they are not traded frequently, a retail investor may get stuck having to pay a hefty premium to exit a position. Looking at a stock from each group including the control, you can see that the program has not had any strong implications on the liquidity of these securities.

HMS Holdings Company (HMSY)

HMS Holdings Company, which is part of the control group, is a small cap stock, which provides cost containment solutions to healthcare payers. The company is still trading in the original $.01 increments and aside from a few one-offs, it has not seen a huge change in volume.

Famous Dave's of America, Inc. (DAVE)

Famous Dave's, a well-known chain of BBQ restaurants is part of the first group. Similar to the control, this security has not seen much of an impact on volume since the pilot's inception.

Buffalo Wild Wings (BWLD)

Buffalo Wild Wings found in the second group of the pilot, has not seen a huge impact from the Tick Pilot Program. Although it has exhibited some recent traction due to the acquisition by Roark Capital Group (which also owns Arby's), you can see on the bottom that the volume has not changed with the implementation of the pilot.

Independent Bank Corporation (IBCP)

Independent Bank Corporation is found within the third, and most restrictive, group of the pilot. Similar to the other names, they have not seen a significant change in trading volume.

Conclusion

With the idea that volume is a proxy for liquidity, these examples show that the Tick Pilot Program has not significantly increased liquidity, regardless of how well known the security is, its sector, or what Tick Pilot group it is found in. Now while this could be an implication of our overall low volatility market, I would still be hesitant to invest in these names before seeing a change in liquidity.

Without significant news releases on one of these names, there won't be much opportunity for strategic investments. Unless an investor is very knowledgeable on one of these names, I would not recommend heavy investment in these securities as the lack of liquidity could pose potential issues for a portfolio.

The SEC was given the ability to change the tick size (required trading increment) after a 2012 study on liquidity deemed that the small-cap companies were struggling in the public equity markets. This allowed them the liberty to experiment with the size of the spread between $.01-$.10. For this pilot, they chose $.05. However, after the pilot's termination in October of 2018, there is a chance they could implement a new pilot with a larger or smaller tick size. My guess is that the SEC will continue to search for a way to increase small-cap liquidity and while the current Tick Pilot Program might not be the answer, they will most likely find a solution.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.