The Tick Size Pilot of 2016-2018

For most US stocks, quotes move in one-cent increments. Regulators worried that for small, thinly traded companies this cent-wide tick was too fine: market makers couldn't earn enough spread to justify quoting size, so liquidity in small-caps stayed thin. The Tick Size Pilot, run by the SEC and FINRA from 2016 to 2018, tested the opposite bet — forcing roughly 1,200 small-cap stocks to quote and, for some, trade in five-cent increments instead of one-cent, to see whether a wider mandatory spread would attract more market-making and deepen liquidity.

The pilot split stocks into a control group (still trading at the normal one-cent tick) and three test groups with progressively stricter five-cent rules — one that only widened quoting, one that also required trading at the wider increment, and one that added a "trade-at" rule forcing most trades onto exchanges displaying the best price. This design let researchers isolate the effect of each individual rule change.

The results were largely disappointing for the pilot's goal: quoted and effective spreads widened substantially (as intended, since the minimum tick itself widened), but measures of real liquidity, such as displayed depth and trading volume, did not clearly improve, and in several studies actual transaction costs for retail-sized trades rose. The SEC ultimately concluded that wider ticks did not achieve the intended liquidity benefits and let the pilot expire without adopting the wider tick permanently, though the data it generated remains widely used in market microstructure research on tick size effects.