New bill to end decimalization for small-cap stocks

May 14, 2013, 12:16 AM UTC

FORTUNE — Small-cap stocks are trapped in a cycle of arrested development. They are small, so they are ignored by analysts and market-makers. And because they are ignored by analysts and market-makers, they remain small.

But new legislation aims to change that, by allowing companies with market caps of less than $500 million to have their shares quoted as fractions rather than decimals. The change could affect more than 3,000 companies currently listed on the NASDAQ and NYSE, with hopes that the wider “ticks” would encourage coverage that has grown progressively sparse since “decimalization” was introduced in 2001.

Rep. David Schweikert (R-AZ) is sponsoring the bill, which has not yet been formally filed. He views it as an extension of his past work on The JOBS Act, a bi-partisan financial reform package that was signed into law last spring by President Obama. Schweikert says that his new legislation, called The Spread Pricing Liquidity Act, also will have co-sponsors from both political parties.

“We first had discussions about including tick sizes in the original JOBS Act, but then began to hear that the SEC was working on the issue and may do something on their own, so we moved on without it,” Schweikert explains. “But that didn’t happen, so now we’re trying to address the issue.”

The bill would allow companies with a public float south of $500 million and average daily trading volume below 500,000 shares to select to have their securities quoted at 5 cent or 10 cent increments. It would be slowly phased in, first for companies below $100 million market cap and 100,000 average trading volume, then to $250m/250k after three months and then to the $500m/500k threshold after another three months. Each of the progressions would occur unless the SEC stepped in to claim that the changes were causing more harm than help.

[UPDATE: Schwiekert’s office said while actual trading could continue between quoted ticks, but the bill itself says that trading would have to be in five cent increments. I’ve reached back out for clarification.]

“We wanted to make sure this doesn’t become a pilot program, because we had a century of a pilot program before 2001,” Schweikert says. “Let’s make the changes, and see if people are willing to make markets… I’ve been to Wall Street around a dozen times over the past few years, and think this sort of approach should work.”

After nine months of implementation, the SEC would be required to report to Congress on the legislation’s effectiveness.

Below is a draft copy of the legislation:

[scribd id=141461230 key=key-162oqz6s5pmpj6rgiv9j mode=scroll]

Sign up for Dan’s daily email newsletter on deals and deal-makers:

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.