It’s tick season again: the time of year when those small, seemingly unimportant beasts emerge and attack the unsuspecting or unaware. This year, they seem to be everywhere and have a particularly robust group of carriers. The problem with ticks is that, while they seem benign, they can cause significant harm to those who are not vigilant.
But this is not about those annoying little creatures that hang out in the tall grass and spread Lyme disease. We’re talking about the kind on Wall Street, transported not by deer, but by a loud army of lobbyists.
Representative David Schweikert (R-Ariz.) and this army of lobbyists, a loose-knit association of exchanges, traders and others who stand to gain financially, are asking the Securities and Exchange Commission and Congress to consider legislation that will increase the cost of trading the stocks of smaller companies — those with market capitalizations of less than $500 million. Those stocks are often less-liquid stocks than those of large-cap businesses.
The logic is that if the brokers can capture more profit on every share they trade, they will put more effort into making those trades (makes sense) and so will increase the liquidity of these particular securities (possibly). This increased liquidity will, they believe, then cause more investors to want to own these stocks, make these better investments and thus will spark a return to the “glory days” of initial public offerings, the late 1990s. Huh?
Let’s start with where the proponents of larger tick sizes are spot on. Making it more profitable for brokers to trade small stocks will, in all likelihood, increase the trading of those stocks. If it is more profitable for a salesperson to sell a specific product, odds are good he or she will do just that. In retail, it’s called a spiff — and it happens all the time.