Market Structure

Tick Size Pilot Distortion

Audited by Cole Barrett • Topic: Market Structure
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Cole Barrett's Reality Check

The Unvarnished Bottom Line

"When the SEC ran the Tick Size Pilot program, they forced small-cap stocks to trade in 5-cent increments instead of whole pennies. Proponents claimed it would encourage research into small companies. In reality, it doubled the bid-ask spread overnight, handing market makers a massive spread toll on every trade at the expense of retail investors."

Interactive Simulator: Test the Math

Interactive Simulator: Calculate Your Execution Friction

Trade Order Size ($) $5,000
Execution Friction / Spread (%) 0.20%
Instant Loss on Entry
$10.00
Sunk toll paid on execution
Annual Toll (50 Trades)
$500.00
Compound capital drag

Real-World Example: Scenario Breakdown

Examining the real numbers for: Trading 10,000 shares of a small-cap equity with a natural market spread of $0.01 vs. a mandated $0.05 tick size

Execution Metric Natural Market Spread ($0.01 Penny Tick) Mandated Tick Size Distortion ($0.05 Pilot Tick)
Fee / Rate $1.00 fee $1.00 fee
Spread / Buffer Quoted Spread: $10.00 Bid / $10.01 Ask ($0.01 spread) Statutory Floor: $10.00 Bid / $10.05 Ask ($0.05 spread)
Execution / Status Crossing the spread cost $0.01 per share Forced to cross a 5-cent spread to execute a market order
Total Cost / Result Tight execution costs in an efficient market Paid an unnecessary $400 markup due to regulatory tick-size restrictions

How Brokers Weaponize This Term

Market makers lobby for wider minimum tick sizes on small-cap equities under the guise of 'promoting capital formation', knowing that wider spreads expand wholesale trading profit margins.

Broker Evaluation Matrix

Cole Approves

Interactive Brokers: Utilizes smart midpoint pegged orders and alternative lit routing to execute inside wide quoted spreads.

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Cole Flags / Avoids

Standard PFOF Portals: Routes small-cap orders to wholesale internalizers that capture the entire wide tick spread on non-directed flow.

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Frequently Asked Questions

What was the SEC Tick Size Pilot Plan?

A two-year test program run by the SEC from 2016 to 2018 that evaluated whether widening tick sizes on small-cap stocks to $0.05 would improve liquidity and research coverage.

Did the Tick Size Pilot succeed?

No. Academic and regulatory post-mortem studies found that the wider tick sizes significantly increased transaction costs for investors and failed to improve trading liquidity.