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November 1, 2013

Protecting Investor Choice

As regulators consider equity market structure, a few changes in tick size or taxation could spell trouble for investors


Paul Jiganti

In recent debates centering on market structure, the issue of choice for investors and other market participants has often not been a prominent part of the discussion. But economic choice is vital to healthy markets, because without it, innovation and price competition suffer.

Securities and Exchange Commission Chairman Mary Jo White's recent speech before the Security Traders Association regarding the path forward on equity market structure recognized the "powerful role" of competition in the markets.

Paul Jigante

White also correctly identified several fundamentals of equity market structure: the importance of technology and operational integrity; the need to test assumptions about market structure; and the need for regulatory decisions to be based on empirical data.

As some voices calling for various market structure changes have grown louder, it is encouraging that the commission will strive to base its regulatory decisions on empirical data. Such data is critical in examining the impact of potential market structure changes-whether increasing tick sizes on certain publicly traded companies or restricting off-exchange trading-would have on investors.

Several data points are already abundantly clear: Retail investors have never had it better in terms of commission rates (cost) and the speed and quality (both in terms of price and fill) of trade execution. Investors also have at their fingertips the trading tools and technologies that merely a few years ago were only available to professional traders.

While this does not mean that the current market structure is perfect, there is a big downside if the "solutions" are wrong and damage the investor experience. Any analysis of potential changes should recognize the current market structure benefits to investors and question whether current or future market structure proposals are being promoted to solve business model problems at the expense of investor choice and competition.


A pilot program to increase the quoting increments of smaller company stocks deserves attention, but should policy makers move forward, we urge caution in how it is constructed. Any pilot program should set clear goals at the outset. It should be limited in scope and duration to measure whether it benefits not only the listed companies but also investors. Investors will want to know if they are paying more for the same trades, including whether an increase in spreads might be offset by increased fill rates or other forms of price improvement.

The construction of a pilot program is important. If designed incorrectly, a pilot will not yield usable results.

First, a pilot program should not include any market structure changes. It should be consistent with the current market structure rules with the one exception of increasing the quote increment. If any additional changes are made in a pilot program, it will be much more difficult to isolate whether the data coming from the pilot are the result of the change in tick size or the other changes.