Dissent is brewing at the Securities and Exchange Commission over whether to increase tick sizes – the smallest pricing increment a stock, future or other exchange-traded instrument can be bought or sold – as a move to improve access to capital for smaller reporting companies.

The Commission's Investor Advisory Committee, created by the Dodd-Frank Act to consult on regulatory priorities for the securities marketplace, has voted against proceeding with a pilot program to increase tick sizes. Its recommendation clashed with that of another SEC advisory committee.

The JOBS Act empowered the SEC to set new pricing requirements for emerging growth companies, allowing shares in them to be traded in wider price increments than the current pricing in one-penny increments, known as decimilazation. On October 2, 2013, SEC Chairman Mary Jo White instructed her staff to work with the exchanges on a pilot program that would do so.

Critics of the current pricing system, in place since 2000, say penny and sub-penny pricing has hampered the ability of small companies to raise funding from both the public and investment banks. Higher tick size increments would give smaller entities the option to trade with a spread of 1 cent, 5 cents, or 10 cents. Doing this will increase liquidity and capital formation for small companies and provide incentives and increased profits for market makers and institutional investors, they say.

In a memo detailing its decision, the Investor Advisory Committee, however, rejected the notion that tick sizes were a primary cause of the continuing decline in small company IPOs. “Moreover, we are concerned that any increase in minimum tick size would disproportionately harm retail investors, who would see their trading costs artificially inflated above the rate set in competitive markets,” it wrote. “There is no persuasive evidence that an increase in tick size would result in beneficial activities to support capital formation – and current market structure would suggest compellingly to the contrary.”

Studies of markets with wider spreads, such as Asian markets, show that wider spreads can lead to undesirable consequences, such as increasing the time to execute trades and exposing market participants to increased market and signaling risks, the committee wrote. These risks can lead to an increase in trading on dark pools, which, in turn, decreases intraday liquidity overall.

It recommended that the SEC should move cautiously before adopting a policy change “that could significantly increase costs for retail investors without offering concomitant benefits in the form of increased capital formation.” The Commission should neither reverse its current decimal pricing policy or engage in any pilot” programs to do so. That recommendation passed by a 13-3 vote.

A dissenting opinion was submitted by committee member Stephen Holmes, general partner and chief operating officer of InterWest Partners, a large venture capital firm.

“The investors in small-cap public companies (with a market capitalization of less than $750 million), face a serious and worsening problem,” he wrote. “Today, the vast majority of these stocks are highly illiquid and their stock prices are quite volatile.”

Institutional investors are still very interested in small-cap growth companies, he said, but have significantly decreased their level of capital committed to this market segment due to adverse market conditions. “Decimalization and the related market rules are the major contributors to the important illiquidity problem of small-cap stocks,” he said, urging that the SEC proceed with a pilot program.

The SEC's Advisory Committee on Small and Emerging Companies – comprised of investors, corporate issuers, securities attorneys, investment bankers and venture capitalists – has urged increasing tick sizes for smaller exchange-listed companies and allow them, on a voluntary basis, to choose their own tick size within a designated range.