The SEC said it is instituting proceedings to determine whether a proposed rule change involving minimum quotation sizes for over-the-counter stocks should be disapproved.
Institution of the proceedings, initiated January 17, “is appropriate at this time in view of the legal and policy issues that are raised by the proposal,’’ the SEC said, in a filing.
On October 6, , the Financial Industry Regulatory Authority filed a proposed rule change with the SEC that is designed to simplify the tiers of pricing and size of quotes.
The commission noted that “FINRA’s limit order display proposal marks a positive step in efforts to improve the transparency of OTC Equity Securities and the handling of customer limit orders in this market sector.”
Specifically, FINRA proposed that the minimum quotation size required for display of a quotation in an OTC Equity Security would fall into one of six tiers rather than the current nine tiers.
Under the current rule, the tiers are as follows:
• $2500.01 per share and above, the minimum quotation size is 1 share
• $1000.01 through $2500 per share, the minimum quotation size is 5 shares;
• $501.01 through $1000 per share, the minimum quotation size is 10 shares;
• $200.01 through $500 per share, the minimum quotation size is 25 shares;
• $100.01 through 200 per share, the minimum quotation size is 100 shares;
• $10.01 through $100 per share, the minimum quotation size is 200 shares;
• $1.01 through $10.00 per share, the minimum quotation size is 500 shares;
• $0.51 through $1.00 per share, the minimum quotation size is 2,500 shares;
• $0.0001 through $0.50 per share, the minimum quotation size is 5,000 shares.
Under the new proposal, the tiers are as follows:
• $175.00 per share and above, the minimum quotation size would be 1 share;
• $1.00 through $174.99 per share, the minimum quotation size would be 100
shares;
• $0.51 through $0.9999 per share, the minimum quotation size would be 200 shares;
• $0.26 through $0.5099 per share, the minimum quotation size would be 500 shares;
• $0.02 through $0.2599 per share, the minimum quotation size would be 1,000 shares;
• $0.0001 through $0.0199 per share, the minimum quotation size would be 10,000 shares.
Based on its study of the Order Audit Trail System data for OTC stocks, FINRA believed that the proposed modification to the current tiers would result in the display of a larger number of customer limit orders, potentially increasing from 50% to 90% the number of customer limit orders eligible for display in some tiers, the SEC noted.
The commission said it has reached any conclusions with respect to any of the issues involved and is seeking public comments.
The OTC Markets Group said it had concerns about the proposed rule change.
“My concern is that there would be a reduction in quoted liquidity for market orders to interact with,’’ said president and CEO R. Cromwell Coulson. “We do not want tight spreads with no size or wide spreads with lots of size, so we are glad that the SEC is looking at what the right mix should be. The rule should be calibrated to balance price and size display.
Tom Steinert-Threlkeld writes for
