SEC Seeks Ideas For Improving Trading in Small-Cap Stocks

Regulators are looking for ways to make the U.S. stock market a better place for trading shares in small- and medium-size companies. The Securities and Exchange Commission on Thursday asked stock exchanges and other firms to submit proposals on how to improve the markets for thinly traded securities. The call for fresh ideas is the latest move in a push by SEC Chairman Jay Clayton to address complaints by small-cap companies that they are poorly served by the structure of the U.S. stock market.

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Currently, stocks can be traded on any of 13 exchanges or dozens of off-exchange “dark pool” venues. Advocates for smaller companies say that such fragmentation makes it harder and more expensive for investors to buy or sell their shares. Around half the stocks listed on U.S. exchanges trade fewer than 100,000 shares a day, according to SEC data. “As we have heard from issuers, exchanges, and other market participants, a one-size-fits-all approach to market structure doesn’t work for many of our public issuers, particularly small and medium sized companies,” Mr. Clayton said Thursday.

In soliciting the proposals, the SEC laid out a number of possible approaches, without endorsing any of them. One such approach would limit trading in low-volume stocks to the exchange where they are listed. Nasdaq Inc. has promoted a similar plan, arguing that it would create deeper markets for small-cap stocks by concentrating the trading of their shares on one venue. But critics, including some rival exchanges, have attacked Nasdaq’s plan as anticompetitive, saying it would benefit big exchanges like Nasdaq.

In another approach floated by the SEC, trading in low-volume stocks would take place in periodic auctions, separated by discrete time intervals, instead of continuously throughout the trading day.


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