Getting into day trading means becoming familiar with all sorts of new terminology. When you look to start understanding what the Securities and Exchange Commission is doing with its 5 cent tick pilot, the terminology tsunami comes hard and fast.
Here is the background: 15 years ago, the market underwent decimalization. Before that, all stocks were trading in fractions of either ⅛ or 1/16. The United States was the last market in the world to go with globalization, partly in an attempt to attract foreign investors who might start to understand pricing a bit better. Now, in 2016, the minimum tick size is moving up 5 cents for approximately 1200 small-cap stocks.
A tick size is the minimum price movement of a trading instrument. Very simply, if a stock costs $1 and has a tick size of $.50, it can move in price to $1.50, but it cannot move to $1.25.
Back in 2014, the SEC began a 2-year pilot program to test the impact of a larger tick size. The goal is see if increasing the minimum spread will create incentives for brokers and investment banks to make markets with small-cap stocks. And the program creators want to understand the possible effect of tick sizes on liquidity.
Now, in 2016, the minimum tick size changed on October 3, for about 1200 stocks involved in the tick pilot program. The 5 cent tick pilot created a minimum 5-cent tick for those 1200 small-cap stocks, which are divided into 3 test groups. Long story short, the 80% reduction in prices where traders can take orders means that there will be more buyers and sellers in each of the 20 price points.
The earliest returns indicate that volatility has been significantly reduced among small-cap stocks in the program. What does that mean for day traders? Well, that means that day traders are losing opportunities for making a profit. Stocks in the tick pilot program seem to have lost the ability to make quick moves.
But from a larger perspective, it appears that the 5 cent tick pilot program might increase the chance of investment banks supporting IPOs and making markets and issuing research reports on small-cap companies. Which could mean that small-caps will benefit from more investment and the overall economy will benefit from more jobs and economic growth. Which is always good for everyone participating in the markets-day traders included.