What's up, everybody? All right? So today we're going to be talking about day trading terminology and the term of the day is the five cent Tick Pilot Program. Now, whether you're a day trader, a swing trader, or an investor, it's really important for you understand the ins and outs of this program. This could affect some of the stocks you're trading, and if you're not aware of it, you're really going to be at a disadvantage when you pull up one of those stocks and you try to take a position because they're going to look a little bit different. This is actually the first time in over 15 years that the SEC is changing the bid-ask spread.

Now, as many of you know, in 2001, we went through decimalisation. Prior to that, the market traded in fractions and so the minimum spread. The smallest spread we could possibly have was 1/16 which is six point two five cents. Now, when we went through decimalisation, all of a sudden, the minimum spread became one penny.

All right. Stocks, right now, trade in a minimum of a one penny spread. You'll never see a spread smaller than a penny except for stocks that are trading below a dollar. Alright, so this is a stock Here trading.

it should be trading for 25. Buy for 26. Alright, this is like a false order, but that's a 1 spent 1 cent spread. Now this 5 cent tick Pilot program is changing the minimum spread from one penny back up to 5 cents.

Alright, so that's a pretty big deal. Now, on April 9th, 2001, all stocks trading above $1 were required to begin trading with 1 cent increments, right? So meaning stocks that were trading at, you know, at 1/8 or trading at 1/16 they now had increments at every penny between the whole dollar. So from $1 to $2 that's 100 increments, right? When you think of all the places you could have an order, so previously it was only you know 8 or 16 depending on how the stock traded. So that represented a 600 to 1,000 percent increase in the number of price points where traders could place their orders between each whole dollar.

All right now. there's several theories what drove lawmakers and regulators to support the shift to decimalisation, and the first belief was that since the US market was the only stock exchange at the time not trading in decimals, that the move to decimals would make the market easier and more attractive for foreign investment. right? Easier to understand the pricing. You know if we if right now I went to go trade on the market that was fractions, it would be pretty confusing.

So if we want to attract foreign investment, you know that was that was one theory. The second belief was that decimalisation would bring more trading volume into the market, that would increase liquidity and improved trading for investors. All right now, in the 15 years since decimalisation, traders and investors are reflecting back on the impact of that historical shift to a minimum spread of one penny. Greg Godsey the head of 360 Wealth Management he said quote.

In my opinion, decimalisation is a negative because it narrowed the spreads and on the surface you would think that would be better for the markets. but narrower spreads mean less profit for market makers, and less profit leads to less capital. and less capital leads to less liquidity, which is really interesting. So a market maker, a market makers job, is to sit on both the bid and the Ask so we can pull up a stock.

Let's see, let's just look at D Ry S for instance, one that has a probably a better spread. So here you've got Edge X And Edge X is a market maker sitting on both the bid and the ask. All right. he's on both sides, he's making the market, and these market makers create the spread.

and they profit by trading across the spread. All right. So when you have a bigger spread, there's more opportunity for profit. All right.

A five cent spread. with 10,000 shares, it's $500 So every time they move 10,000 shares, that's $500 profit. But with a one cent spread? Well, that's only $100 So the profits go down to the point. And this is the the theory to the point that some market makers have lost the incentive to even make the market on these types of stocks.

So what does that mean? That means less of the big institutions, less of the market makers are holding positions of these stocks there in turn, less likely to issue reports, research reports, you know, price analysis, upgrades, downgrades. You know, stuff like that They're less likely maybe to have investors come in and take large positions. And so all of this concern was based on Congress being worried about the small cap market and and really also concerned about IPOs because isn't the goal that a stock comes into the market as a small cap at IPOs as a small cap and then grows and grows and grows. A lot of the big companies started at very low prices.

You think of Apple and some of the others, and then they've grown to some of the largest stocks on the market. So you know we certainly want to continue to see that. You know that trend. And that's why in 2011, a group of professionals known as the IPO Task Force released a report that sharply criticized decimalisation.

It stated quote the adoption of decimal pricing where in stocks are priced in pennies instead of by fractions of dollars by 2001 further reduce the economic opportunity portrayed for investment banks, right? And it's kind of fun. Like, as if as if the retail traders really care about what's good for investment banks. but you know this is sort of that trickle-down theory that if it's not good for them, they're not gonna be investing in these small stocks and then you know there's less opportunity for growth in and I Continue here and this quote. In the new low-cost frictionless environment promulgated by electronic trading and decimalisation, investment banks now generate revenue primarily by executing high volume of low priced trades meant to capitalize on short-term changes in the price of highly liquid very large cap stocks.

All right. So let's let's kind of break that down: I You know this is a that might be a little confusing. so in other words, market makers are less likely. This suggests to trade small cap stocks and they're more likely to trade large cap stocks such as a stock like Siri All right, this is a stock where you've got 200,000 shares on the bid, 200,000 shares on the ask, and these shares crossing the bid and ask all day long.

It's a hundred dollars each time. Hundred dollars Hundred dollars hundred dollars. This is fairly safe. Look at.

I mean realistically, look at the volatility here. Even with a hundred thousand shares, you're just not seeing that much movement. The stock pretty much just goes sideways. This is the type of stock that a market maker is going to profit on with high frequency trading and a stock.

like let's just say, for example, d ry yes or or G lbs and even a more thinly traded stock. There aren't very many market makers trading the stock, All right. So the result is that this is not a very liquid stock. It would be hard to get into the stock and get out of it with size, meaning that if there was an investor who actually wanted to take a position, he probably wouldn't be able to buy 50,000 shares of this without it making a really giant move.

And that's because there's not market makers providing the market for that type of liquidity. So the long and the short of it is that in this IPO Task Force report in 2011, you know they made no to the fact that Apple, Cisco, FedEx, and Starbucks all enter the market with IPO as a small cap stock. small and mid-cap companies that have since grown to become some of the largest companies on the market. So the Task Force suggests that decimalisation has made for a less than favorable environment for small cap stocks because market makers and investment banks don't profit from the spread the way they used to.

and as a result, they're less inclined to provide or make the market on those stocks support their IPOs or conduct research on these emerging emerging companies. All right. So evidence to support that theory was the fact the number of IPOs between 2001 and 2011 had dropped sharply versus the 10 years prior. Alright, so in 2012, now the JumpStart our business startups, the JOBS Act required in section 106 that the SEC issue a report on the impact of decimalisation and in particular, its impact on IPOs Right now, you guys probably didn't know this, so this was actually mandated that the SEC had to issue this report.

And in this report, the SEC directly responds to the IPO Task Force report. At the end of their 27 page report, they concluded the impact of mandating an increase in the minimum tick size for small capitalization companies, on the structure of our markets, and on the willingness of small companies to undertake initial public offerings is at best uncertain. although mandating an increase in text size to levels greater than those presently dictated by market forces may provide more incentives to market makers in certain stocks. The full impact of such a change, including whether or not an increase in text size would indeed result in more IPOs and whether there would be a significant negative or unintended consequence is difficult to ascertain that was their report to Congress.

So the Commission determined that they should not make a change at that time from the minimum once then spread on all stocks over $1 Well, in 2014, despite that 2012 report, a 2014 bill by the House of Representatives required the SEC to implement a two-year long pilot program to test the impact of a larger minimum spread. Lawmakers and regulators again are hypothesizing that increasing the minimum spread will create incentives for brokers and investment Baker's to make the markets on small cap stocks, and this in turn will make them more likely to support the IPO s issue, research reports, and actively invest in small cap markets. So this pilot program that we're seeing right now will also examine whether a larger spread will increase liquidity, reduce volatility, and result in sustainable long term growth in small cap stocks. Now, some of the opponents of the Tick's pilot program argue that increasing the minimum spread will result actually in greater risk for investors, increased complexity in the exchange and higher Commission costs.

Greenwich Associates conducted a survey of institutional traders and found that only 4% believe increased capital formation opportunities for emerging growth companies will be the result of the five-cent spread. In addition, only 9% believe will actually improve liquidities liquidity in those securities, All right. So this is kind of where we're at right now, forced to comply. The SEC and FINRA worked with market makers and the investment banks over the course of two years from 2014 to 2016 to build out the framework in the technology to create the 5 cent spread.

So now two years later, here we are the end of 2016 the On October 3rd, the 5 cent tick program is launched alright and now for the first time in over 15 years, the minimum tick size has changed for approximately 1,200 stocks that are part of the tick size pilot program. All right. So these stocks now trade with a minimum of a five cent spread. So remember how we were looking at Ciri before? This is a stock that trades for the 1 cent spread, but trades very, very thickly.

It really doesn't move Well, let's look at the float. The float of this stock is Three Point Seven Nine billion Shares with 21 billion share mark 21 million dollar sorry 21 billion dollar market cap So this is a very thickly traded stock. Let's look at another one that trades pretty thickly. Bank of America 10 billion share float 227 billion dollar market cap another one Sprint 33 billion dollar market cap Flow to Two Point Seven Nine Billion Shares and we can look at Sprint These stocks.

They don't move. So these are the types of stocks. That and actually this one's been a little bit more volatile. But for the most part, these stocks really don't make big moves.

We're talking about a 10 cent range, so as a result, these are the ones that are more popular among the investment bankers and the market makers high-frequency traders Because they're so liquid, they can shift 10,000 shares you know, every couple seconds from one side to another and it's not going to affect the liquidity. You could literally come in here and buy a million dollars worth of stock and it wouldn't move a penny if you tried to do the same thing on gee Lbs, this stock would probably drop. You know, if you tried to sell a million dollars with the stock, this thing would probably drop like a point and a half because there's no liquidity. there's no one there to absorb that type of sell order.

Alright, and that's obviously that does increase risk for for investors. Someone who does want to buy a really large position, who would? It would be really hard So you know I Understand that. But here's the thing with the 5 cent tick stocks that previously traded sort of the way G Lbs trades now trade like this. Look at that.

Look at how similar that is to Sprint or at a Siri. Right now, it starts to look the same. All right. Well, here's the reason.

by implementing a five cent spread, there will now be only 20 price points between each whole dollar, right? So when there were 100 now you could put an order. Let's say it. 401, 402, 4, 3, 4, 4, etc. all the way up to $4.99 and five dollars.

That's a hundred price points where you can place orders. Well now, we just pulled out 80% of those price points and there's only 20 left and they're at every 5 cent increment. So they're now priced will go to ship. You'll see here on the level - everything is in fives.

It will either be on a dime or on the nickel. So - 120, 125, 130, 135, etc. Here's another one. DP Rx Everything is going to be priced on the nickel.

All right. So the dime and the nickel. Now this means when you remove 80 percent of the price points, all of the buyers and sellers are forced into these little trenches, right? And so everyone groups together in these trenches. Right at the nickel and the and the dime.

So you now have a lot more liquidity. And you do. You could get into this with 20,000 shares. Now, we're in the past that stock might have traded like gee Lbs and you simply would have been able to.

You can see here, you've got a thousand shares at Five Ten, two hundred at Five, Eighteen Zero at 5:22 and a hundred shares at Five Thirty Five. This could move up to Five Thirty Five in almost a heartbeat. Siri on the other hand, obviously can't even move up to, you know, Five Fifty Five in a heartbeat. And now ship a similar stock because of the five cent tick.

This even to move ten cents would require a tremendous amount of volume. And so what's really interesting is that ship is a fairly low float stock and I'll pull up my let's see my report here. So let's see what is ship at now. Ship looks on the level - just like Sprint but it's actually only a 13 million share float with a market cap of just 40 million shares.

So it is a fraction of the size, but now it's trading in almost the same way. So if you have a trader now with a twenty thirty thousand share position, he can sell here. On to the market and it will be executed instantly. He probably won't get any slippage because there's a lot more liquidity, so during these two years, this will sort of be the test.

Does this actually increase? IPOs Does it increase investment bankers and market makers to be engaged in these stocks, putting out research reports and taking investments? Does it reduce volatility and make for a more favorable environment for investors? And you know, the priority here is not what's good for traders, day traders profit from volatility, but really what's good for investors and what's good for a long-term You know success of these small small cap stocks. Okay, so in the pilot program, the stocks affected are split in two groups. The first group contains about 200 stocks and this is considered the control group and these stocks will continue to trade at 1 cent spreads. The first test group will be quoted in 5 cent increments, but will continue to trade at their current increments so it'll be quoted at 5 cent increments, but trades can go through between the spread.

The second test group will be quoted at five cent increments, but will allow certain exceptions including midpoint trades for retail investor executions, so that group will only allow midpoint trades. So a trade? I Guess it 1:22 0.5 The third test group will be quoted at 5 cent increments and traded at 5 cent increments and will follow the same requirements of the second group which will allow midpoints but will also be subject to a trade at requirement which is something that is detailed in the FINRA on the FINRA website. Alright, so essentially these stocks right now for the next two years they're trading in five cent increments look like this. So when I see a stock and this is today is a good example.

It's why I want to do this video. I Saw DP RX is the lead-in gap or gapping up 65% with a five point, four seven million share float. It's a low float stock. This is the type of stock that in the past like Dr.

Ys D Ry S, look at how this stock moved. This stock went from literally four dollars to over a hundred dollars in four trading days. That was an incredible opportunity for traders, but this type of volatility may not be favorable for investors. It's really hard to invest in stocks that could do this type of thing because it could just it just catch you so off-guard and as quick as it went up it came all the way back down.

So you know here's the stock like DPR X that is similar in the float and we might think on another day or if this was a difference sorry DP DPRK's on another day. With a stock not affected by the pilot program, it's the type that could potentially move up quite a bit. We could easily see a 20, 30, 40 % move. but today the biggest move was pre market when the liquidity was lower and then as soon as the bell rang we just sold off.

So you can see here at this point, the market makers are really able to control the stock in a lot of ways. They're able to control the stock and that's going to be a problem for retail traders, for day traders, and for swing traders. For investors that are looking at the fundamentals over the long term of three six twelve months, this is not going to have as much of an impact because the positions are such a different time frame, but for short-term traders, this is really decreasing our ability to profit because we are seeing as a result less volatility. Alright, and that's an important thing to understand.

So you know right now, the initial reaction to the you know the tick size pilot program among traders is that it is in fact reducing volatility among small caps, and thereby it is achieving one of the goals of the program. So a stock like DP Rx that formerly might have squeezed up twenty thirty percent or even more you know now appears pretty much pegged at the same price, especially after a period of you know, a couple hours just consolidating. And this is a time frame when the market makers can start to profit. Right now, they can just move this move across that five cent spread and they can generate a profit.

So they are really trading a lot. A lot. Like these large cap stocks like Sprint which of course has lots of market makers, lots of institutional traders, lots of research analysis, lots of opinion, All that stuff. and you know, obviously Sprint is I Suppose making its way out of the small caps I mean slowly, but it is making its way.

It's up over the last year about you know, looks like it's doubled from three dollars, well almost tripled up to nine dollars. So this is the type of thing I Think you know that Congress and lawmakers are thinking is what you want to see small caps doing so have them. IPO Of course this has been around for a long time, but have them. IPO Have them start.

you know, attracting retail investors, attracting institutional investors, and grow from a small cap up into a mid cap in the large cap stock and will it tick size pilot program help in that you know in that goal. Maybe it will and it will change the way we look at some of the small cap stocks. So what it may do is it may force us to start trading stocks that are not going to be affected by this by this program. Alright, so stocks that are a slightly higher price, but are still really volatile.

so how would we find those stocks? Well, the easiest way to do it is to create a simple scanner. Now I can go in here. Go into Advanced. This is Trade Ideas Trade Ideas software that I'm using and you know this isn't something that we really need to worry about now and again.

We're at 2016. It was 2012 when Congress or the House of Representatives required that the the SEC do this two year long program. It took them two years to figure out how they would do it. Now we're starting it here.

It'll finish in 2018 and then who knows how long it would take if they decide to actually implement something across the whole market. It could take another, you know, year or two. Who knows. So this is not something we really need to worry about immediately, but it does also show the value of being able to diversify your strategies.

The good thing about trading is that once you understand chart patterns, you can apply them to any stock of any price range. The reason I like trading small cap stocks is because right now they are so popular among retail investors and stocks like Sprint and Bank of America are not retail traders. don't trade this type of stuff. Alright, so if there ends up being a change where small caps trade like Sprint and and Bank of America then all retail traders most likely will switch to a different area of the market.

Whether it's you know the stock's price between 20 And 30 dollars that start to get a lot of attention I'm not sure, but you can. you can bet the retail traders will find another area of the market for volatility. All right. So just to create a simple scan here, we could go in and we could say you know we're going to look at stocks If we know for instance, that the market they're going to be applying this to a certain market cap, We can go and create a market cap filter to only look for stocks that have a market cap of over.

let's say a hundred million shares, a hundred million dollars. All right. So market cap of 100 million dollars And then we could say you know we only want to look at stocks priced above $10 and then we only want to look at stocks that are volatile that that actually move. The best way to do that is to use Average True Range so we can go.

We can add this I could say I want a minimum average true range of you know let's just say 50 cents a day and that's probably setting it low. Alright, so here we can call this high 80 our 1 cent spread stocks and then here you can start sorting based on the float if you wanted to or you could start full. If it's based on market cap, you'll still have some low float stocks or you could you can sort by Average True Range You got to go in here to configure advanced and add the column. so let's just add the column for ATR move that over there.

say Ok Ok and now if I stretch this out here, we'll see ATR So I can look now at the stocks that have large ATRs and maybe I want to put a price cap? so I'm not seeing stocks that expensive, but here's a stock Blue for instance, it's got a 4.4 dollar ATR which is a pretty big ATR for six $60 stock. So this one's going to continue to trade most likely in one cent spreads. I mean unless they change what the thresholds are and I just put in a hundred million. but you know this is a stock that here you have you know your bull flag and that's a bull flag breakout.

So the reason these patterns work is because thousands and thousands of traders are buying at the breakout point because they know these the types of stocks that provide the biggest opportunities for profit. So you know My my thought is that if small caps for whatever reason because this in 2018 2019 2020 turn into 5 cent spread then I would imagine all retail traders will start focusing on you know, stocks that are volatile and still provide opportunities. so stocks like blue would start getting better follow through. AG IO Here this one's $40 stock.

again a lot of range between 42 there and 42 see A So these patterns right now they don't get as much follow-through because traders generally prefer to trade the lower price stocks. they're more profitable. But you know if that changes, the market changes, then we'll see trade or shift and they may shift to the OTC market or to penny stocks. but I hope they don't I Hope that retail traders stay on NYC and Nasdaq and just look at the higher priced option So that's what I'm going to do.

I'm not going to get into OC o TC stuff at least I Hope I don't have to I Hope that we'll still see opportunities here I Think we will. We already have some and I think they'll just continue to get better. Alright, so at this point, right now in 2000 in the Spring of 2018, the SEC will be in April of 2018 issuing a report on their findings. So this is something that day.

Traders swing traders and investors, market makers, regulators, investment bankers and lawmakers will all be eerily awaiting. Alright, so you know we'll see I mean the whole idea here with the 2012 JOBS Act was to create more jobs was to help small companies to have more IPOs and more benefit from investment and stuff like that. So this is a you know when you think about the big picture this is for the economic good of you know the this you know I suppose country and all stocks on this market. So we just have to adjust as traders.

And of course in 2001 all traders had to adjust when everything changed from fractions to decimals. So this is part of the life of being a trader. You do have to adjust. There are going to be times where there are things that are just outside our control.

So for the next two years I want you guys to make sure you know how to identify stocks with the five cent spread. Easiest way is to pull up the level two and look, if you only see quotes at nickels and dimes, there's a good chance this stock is five cents spread right? five cent tick. So I would probably say I'm not going to trade it. These ones are not easy to day trade and that's the easiest way to do it.

Just look at the level two and if that's what you see then then you'll skip on the trade. And that also exemplifies the importance of using level two to be able to see these types of things. Because if you're not using this as a tool, then you really are trading almost with one eye closed. So if you don't know how to use level two, we've got another video day trading terminology level 2 that you guys can check out.

and yeah, if you have any questions, feel free to put comments below. I'm happy to answer them and I hope you guys all trade safe and trade smart. All right guys! I'll talk to you soon. Let's be honest, if you made it this far, you must have really enjoyed that video.

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