As an aspiring day trader, you need to keep up with emerging trends in the market and stay on top of changes that can affect your day to day trading. That is why it is so important to understand the SEC’s tick pilot program.
In October 2016, the SEC began a program to move the tick size of stocks from 1 cent to 5 cents for certain small capitalization stocks. Why? That is the operative question. Well, the main reason is to study the effect of tick size on liquidity and trading of small-cap stocks. The program is set to run for two years, so that regulators can assess whether larger tick sizes help improve the quality of the stocks. Basically, whether the wider tick sizes will entice larger banks or market makers to enter into that market and help reduce volatility and increase liquidity.
How does this affect day traders and interactive brokers alike? Well, more volatility is good for day traders. You want stocks that are poised to move a lot on a particular day. That is where day traders make their money. Remember, day trading is not investing. As a day trader, you are not sitting on a pile of shares, hoping that they are going to jump in value and provide you with real profit or dividends. Your job is to find stocks that are moving quickly and get in and get out with a piece of the profits.
Decreased volatility is not a net gain for day traders. But, the good news is that this only really affects 1200 small-cap stocks right now. There is no wholesale change to the market.
What this stems from is the SEC’s decision in the early 2000s to switch the NASDAQ and NYSE over to a decimal system for tick prices, like the rest of the world, so that stocks could be traded at any price point between 0 and 100. It was geared toward making the market easier for foreign investors to understand, so that they would inject their capital into the market in an easier manner.
Later on, some think that initial public offerings, or IPOs, for smaller companies decreased, because the smaller tick size, discouraged large investment banks from getting involved. They did not see the point in messing around with such little potential profit margins.
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