SEC still short on answers to 'decimalization'

A series of SEC roundtable discussions on decimal-based stock trading has raised more questions than answers on how decimalization impacts small-cap IPOs.

The US Securities and Exchange Commission (SEC) is still undecided on what impact “decimalization” has had on the ability of small and micro-cap companies to undergo an initial public offering (IPO).

The Jumpstart Our Business Startups (JOBS) Act signed last April required the SEC to examine the issue and later report its findings to the government. 

US stock markets adopted decimal pricing increments in 2001 with the hope of reducing artificially wide spreads under the previous fractional pricing system. However critics of the switch argue decimalization can make it more difficult for small and micro-cap companies to gain adequate liquidity, which in a downward cycle, means they do not capture the attention of research analysts who are often used by public-market investors to select stocks. 

Despite a formal study and series of roundtable discussions on the issue earlier this month, the SEC is still unsure if it should allow increased trading increments for small-cap companies.

Stephen Holmes, chief operating officer and general partner at California-based venture capital firm InterWest Partners, and winner of the 2013 Private Equity Manager Leadership Award, highlighted the issue during his acceptance speech at the PEI CFO COOs Forum held earlier this year in New York.  

Pepper Hamilton lawyer Brian Korn expects the SEC to conduct a pilot program to “test drive” a change in decimalization. This will involve increasing the trading increments for volunteer securities so that the SEC can see whether this has a material benefit on liquidity of small and micro-cap companies.
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