The trouble with small tick sizes: Larger tick sizes will bring back capital formation, jobs and investor confidence

The Jumpstart Our Business Startups (JOBS) Act, signed into law on April 5, 2012, delivered two of the three legs of the stool required to revive the U.S. IPO market: 1) a framework to lower costs for small companies accessing the public markets, and 2) a framework to improve company communication with investors in the public and private markets. The authors argue that a framework to realign economic incentives in the public markets, primarily through a higher tick size (the minimum increment in which a stock or other security can trade) pricing regimen, is the essential third leg that is currently missing from the stool and recommend solutions encompassed in what they call The JOBS Act, Part 2.

The authors conclude that higher tick sizes will:

• lead to investment in the ecosystem (research, stock sales, investment banking and capital commitment to provide institutional liquidity) required to successfully take companies public and support them in the aftermarket;
• favor long-term investors and stock pickers over short-term traders; and
• increase investor confidence by reducing the number of price points at which stocks are traded and by limiting computer trading behaviors.