SEATS TICK SIZE

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					                                                                                                                                         No: 447/04




    ASX Circular                             SEATS TICK SIZE
                                             ASX currently has three different minimum price steps (tick sizes) when trading stocks1.
    Date: 1 September, 2004                  The tick size for stock orders:
    Key topics
    1. Seeking feedback on proposed                       •         Priced below $0.10 is $0.001
       changes to Tick Size tables                        •         Priced from $0.10 to below $0.50 is $0.005
                                                          •         Priced $0.50 and above is $0.01.

                                             A recent study on tick sizes from the University of Technology, Sydney concluded that
                                             for low priced stocks, the current tick size schedule may result in excessively large
                                             minimum percentage spreads (particularly for very active low-priced stocks that
                                             currently trade at the minimum tick size). Excessive spreads imply high transaction
                                             costs which in turn may constrain the natural liquidity of such stocks.
    Reading List
    Institutions                             In November 2003, ASX released a consultation paper (Enhancing the Liquidity of the
    Market Participants                      Australian Equity Market) which sought feedback from market participants on the
    Managing Directors
                                             following proposed changes to tick size schedule2:
    Office Managers
    Compliance Managers                          •   For stocks priced below $2.00, a minimum tick size of $0.001

    Contact
                                                 •   Priced from $2.00 to below $10.00, a minimum tick size of $0.005
                                                 •   Priced $10.00 and above, a minimum tick size of $0.01
    Nicholas Rugg

    Telephone                                Feedback from market participants on the proposed changes indicated that whilst a
                                             majority agreed with the concept of reducing tick sizes for low-priced stocks in order to
    (02) 9227 0047                           reduce minimum percentage spreads, there was general consensus that a 0.5 cent tick
                                             size for stocks priced up to $10 was too broad and that ASX should focus on low-priced
    Australian Stock Exchange Ltd            stocks only.
    ABN 98 008 624 691
    Exchange Centre
    20 Bridge Street                         Based on this response, ASX is seeking to reduce the minimum price step to 0.5 cent for
    Sydney NSW 2000
    PO Box H224
                                             one of the following cases:
    Australia Square NSW 1215
                                             Option A - for all stocks priced from 50 cents to below $2, or
    Internet: http://www.asx.com.au
                                             Option B - for all stocks priced from 50 cents to below $1, or
                                             Option C - for Listed Property Trusts only, priced from 50 cents to $2.

     No responsibility is accepted for any   Option A is ASX’s preference. Under Option A, the complete price schedule would be:
     inaccuracies contained in the matter
     published.
                                                 • 0.1 cent tick size for stocks priced below $0.10 (i.e. no change)
                                                 • 0.5 cent tick size for stocks priced $0.10 to less than $2.00
                                                 • 1 cent tick size for stocks priced above $2.00 (i.e. no change)




1
    Standard equity, warrant and ETF securities
2
    For additional background to the proposed minimum price step changes, please refer to Section 4 of ASX Equity Market Reforms – Enhancing the
    Liquidity of the Australian Equity Market (www.asx.com.au/equityreforms)


    asx013653                                                                                                                           Page 1 of 3
                                                                                                                     No: 447/04




The proposed change to the minimum price step schedule for stocks priced $0.50 to $2.00 is expected to benefit this
segment of stocks by reducing the minimum spread (and thus, transaction costs) relative to stock price. For high turnover
stocks that may be currently inhibited by an excessive spread, lower relative spreads are anticipated to influence increased
market turnover and liquidity.

Support for minimum price step changes: previous reductions in ASX’s minimum price step schedule
The last time ASX made a significant change to the minimum price step schedule was in 1995. At that time, ASX
simplified the price step schedule from seven steps to the existing three and in doing so reduced minimum tick sizes for
the majority of stocks (refer to the table below).

Absolute tick size changes that were made on 4 December 1995:
 Group                  Price range             Pre-change                                     Post-change
                                                                                            (Current schedule)
    1                          $0.00 to $0.10                         $0.005                      $0.001
    2                          $0.10 to $0.50                         $0.010                      $0.005
    3 (no change)              $0.50 to $10.00                        $0.010
    4                            $10 to $50                           $0.020
    5                           $50 to $100                           $0.050                        $0.010
    6                           $100 to $999                          $0.100
    7                            Over $999                            $1.000

A recent research paper by Aitken and Comerton-Forde3 analysed the effect of this reduction to minimum price steps and
found that low-priced stocks gained the most from the tick size reductions – exhibiting significant decreases in bid-ask
spreads and an overall increase in liquidity. The increase in liquidity was most evident in securities with a high turnover,
suggesting that prior to the reduction, the tick size may have been constraining the natural liquidity of the stock. The
paper’s conclusion supports the current proposal to further reduce the minimum price steps for low priced stocks (between
50 cents and $2.00) with high relative tick sizes.

Request for Comment
ASX is seeking to reduce the minimum price step to 0.5 cent for one of the following cases:

       •     Option A - for all stocks priced from 50 cents to below $2, or
       •     Option B - for all stocks priced from 50 cents to below $1, or
       •     Option C - for Listed Property Trusts only, priced 50 cents to $2.

Which option would you endorse?



If you chose none of the options, in your opinion, should there be a different change to the price step schedule?



Do you believe that making the change referred to in Option A will have a negative impact on either the equity or
derivative markets? If so, please explain how the negative impact will arise and the implications for market quality or
efficiency.




3
    Aitken, M & Comerton-Forde, C (2004) Do reductions in tick sizes influence liquidity? (Working Paper)


    asx013653                                                                                                       Page 2 of 3
                                                                                      No: 447/04
            Please email your comments to Nicholas Rugg – nicholas.rugg@asx.com.au
                        Thank you for taking the time to provide your comments.




asx013653                                                                            Page 3 of 3

				
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