U.S. retail brokers warn ‘tick size’ plan to boost investor costs

NEW YORK (Reuters) – A plan by the U.S. Securities and Exchange Commission to widen the minimum trading increments of some small-cap stocks to test if that would spur more trading could end up harming mom-and-pop investors, retail brokerages said in letters to the regulator.

The potential cost of the program to all investors could be up to $455 million dollars annually, TD Ameritrade Holding Corp said in a letter dated Dec. 22, and posted to the SEC’s website on Tuesday. The No. 1 retail broker by client trading volume estimated the potential cost to its customers between $11 million and $18.4 million.

The SEC’s proposal would increase the minimum size between the bid and the ask price of some thinly traded stocks of companies with market capitalizations of $5 billion or less, trading at $2 per share or more, to 5 cents from 1 cent for a one year period.

Supporters of the plan, known as the “tick size pilot,” say it would incentivize brokerages, which profit off of the bid-ask spread, to post more bids and offers, making it easier for others to trade these stocks. The brokerages could then use the extra profits to increase their research on small-cap companies, prompting more firms to go public and provide more jobs.

But some retail brokerages say the plan is flawed and its costs may outweigh any benefits.

Charles Schwab Corp said in a letter to the SEC that the program would ultimately result in a “wealth transfer” from retail investors to stock exchanges and middlemen. Fidelity Investments also said in a letter to the regulator that it does not support the plan.

All three of the retail brokers said the pilot, which includes three test groups and a control group, would add unnecessary complexity and risk to the market and, because of that, many brokers and investors might stop trading the stocks chosen for the pilot altogether.

The firms also opposed the idea that stocks in one of the test groups would be forced to trade more on exchanges rather than in broker-owned alternative trading systems, where nearly all retail orders end up.

This could erode a significant source of profit for retail brokerages, most of which sell their client orders to other brokers to be executed, rather than paying exchanges to match them. Retail orders can be more profitable for brokers than orders from better-informed institutional traders.

(Reporting by John McCrank)