Switch to Decimals Weighs on Stock Markets

SAN MATEO (06/23/2000) - While there was much buzz about e-commerce strategies at a securities industry event in New York this week, a potentially major operations problem is lurking -- the move from listing stock prices in fractions to decimals.

In fact, the industry was supposed to have made the transition to decimals by early next month, but that deadline was moved, largely because the Nasdaq Stock Market Inc. asked the U.S. Securities and Exchange Commission in March to delay the July 3 deadline for trading in decimals. Supporting Nasdaq in its call for a later deadline was the Securities Industry Association (SIA), which sponsored this week's 2000 Technology Management Conference & Exhibit event.

About two weeks ago, the SEC issued another order mandating that the securities transaction markets, including the New York Stock Exchange Inc. (NYSE) and Nasdaq, prepare to phase in decimalization pricing. The SEC is requiring that exchanges have decimal pricing for listed stocks and options by Sept. 5, 2000, and that Nasdaq begin decimalization by March 12, 2001. For all U.S. securities, the SEC wants pricing in decimals by April 9, 2001. Industrywide testing in preparation for decimalization is slated to begin in mid-July.

Driving the decimalization push is the desire to abandon 17th-century financial conventions for a fairly universal price display that can be used globally.

Frank G. Zarb, chairman and CEO of Nasdaq, said recently that Nasdaq will be ready to implement decimal pricing for listed securities in September and by the end of the first quarter of next year "on a pilot or full basis, in nickels or pennies." An NYSE spokesman said, "We are decimal-ready. As far as we're concerned, it's all systems go."

However, many in the industry are skeptical about deadlines. "I wouldn't be surprised if that gets postponed as well," said a source at a major Wall Street firm, which, although concerned about decimalization, is more focused on its e-commerce strategy.

The delays, cited by the source and others, are related to the tedious problems that will result from the jump in trading volumes generated by decimalization.

User firms and the exchanges will have to adjust applications, hardware, and networking infrastructures to handle the price conversion.

For instance, the NYSE conducts trading in increments of sixteenths, which provides participants with 16 possible prices. The anticipated move to trading in nickel increments would cause 20 different price points, and a conversion to displaying prices in pennies would lead to 100 potential price points.

The greater variety of price points will lead to a dramatically increased number of messages that have to be handled by the exchanges, market data vendors, and the trade order transaction systems needed to generate trades, quotes, orders, cancellations, and reports.

Yet Glenn Schorr, an analyst at Deutsche Banc Alex. Brown Inc., in New York, said the exchanges have an incentive to meet the deadlines. "They need to keep liquidity in their exchanges," Schorr said.

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