An Expensive Experiment

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What's going on?

A two-year experiment by the Securities and Exchange Commission (SEC) to get banks and investors to care more about smaller companies has cost said investors $300 million. Oops.

What does this mean?

The Tick Size Pilot Program changed how stocks of smaller companies traded. Under the test (which included 1,400 stocks), when stocks moved up or down, they moved by bigger increments. So if a share price was $5.00, instead of moving to $5.01, it would be $5.05. This way, banks get more money from trading (bigger stock moves means more money from fees). The hope was that banks would then write more research helping investors to understand these stocks and invest. A win for everyone, right?


Not quite. According to BlackRock, the cost to buy and sell stocks of smaller companies has risen by 35-45% (tweet this). However, banks havent seemed willing to hire people to do more research on the back of an experiment.

Why should I care?

The bigger picture: Markets are stuck in a halfway house.


The SECs currently in a chicken and egg situation. Because the programs a test, banks wont commit big money to beef up their research teams in case the regulation doesnt stick. Even if it does, they may want to stay lean and make more profit. In the UK, tighter regulations from MiFID II (which makes it easier for investors to see what prices theyre paying for trading services) has reduced trading revenue for lots of banks (as they arent able to charge as high fees) and caused many to cut jobs (Japanese investment bank Nomura cut a chunk of its European business).



For you, personally: Look forward to higher costs to trade.


Huge global asset managers like BlackRock and Fidelity have billions locked up for investment, which most likely includes some of your pension if you have one. So the higher costs theyre facing will likely fall at your feet in the form of higher fees. If theyre growing your money, it wont be for free.

Originally posted as part of the Finimize daily email.

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