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SEC Staff Studies Small Cap Market Quality

A new study from SEC staff examines market quality in small cap stocks. The study, A Characterization of Market Quality For Small Capitalization US Equities, reviewed quoting data for each trading day in 2013 for stocks with a price of greater than $2 and a market cap of $5 billion or less (representing a daily average of 2814 symbols), the same parameters set for the SEC’s upcoming tick size pilot. The study examined spreads and volume categorized by market cap and closing price.

The study found that spreads generally increased with jumps in price categories, and the median spread ranged from 6.22 to 113.52 cents in the smallest market cap category (less than $100 million) to 1.00 to 17.40 cents in the largest category ($2 to $5 billion). The study also offered insight into the upcoming tick size pilot by showing that 1,534 symbols in the study were, in some manner, “constrained” for at least one day during the review period by the minimum price increment of a penny

While the data showed that the order book was generally deeper with stocks in higher price categories, the effect was even more pronounced in the upper categories of market capitalization. Stocks in the lowest market capitalization category had between 0.2 to 1.1% of the depth of the highest category when comparing stocks of similar prices.