Nasdaq Stock Market -- the main obstacle standing in the way of conversion from fractional to decimal stock pricing -- is vowing that it will meet a new deadline set by the US Securities and Exchange Commission (SEC) for making the change.
Nasdaq CEO Frank Zarb told Congress yesterday that the exchange will be ready by next March for full decimal pricing, as the SEC is now requiring. "Nasdaq will not be an impediment to decimalisation of the exchange-listed market," Zarb said during testimony before the House Commerce Committee's Subcommittee on Finance and Hazardous Materials.
According to the SEC's order, which also was issued yesterday, the stock markets must begin to convert to decimal pricing of exchange-listed stocks -- that is, all stocks except those listed on Nasdaq -- by September 5. Under the SEC's order, decimal pricing of Nasdaq stocks would begin being phased in by next March and the conversion would be completed the following month.
The US is the only country in the world that continues to use fractions in stock pricing, a situation the SEC is insisting be changed.
"The US securities markets must adopt the international convention of decimal pricing to remain competitive," said SEC chairman Arthur Levitt in a statement. "The overall benefits of decimal pricing are likely to be significant. Investors may benefit from lower transaction costs due to narrower spreads, and prices will be easier to understand."
Zarb agreed to the SEC schedule during his House testimony. "From a technical standpoint, it appears possible for exchange-listed securities to be traded in decimals while Nasdaq trades in fractions," he said. "This transition will not pose the system problems that full Nasdaq implementation of decimals would entail, because the exchange-listed securities are a small fraction of Nasdaq volume."
Zarb added that Nasdaq will be ready for full decimal pricing, in either nickels or pennies, by next March 31. But he warned that exchanges that sell stock options -- such as the Chicago Board Options Exchange -- may experience difficulties as a result of decimalisation because changes in stock prices will trigger changes in a higher number of options tied to that stock.
For example, popular stocks such as Amazon.com, Intel and Microsoft could have more than 100 options associated with them, said Larry Tabb, an analyst at Massachusetts-based TowerGroup. When the stock price changes, the price of each option must be updated, Tabb said -- and with penny pricing, stock prices will change more often than when the smallest increments were 1/16 of a dollar, or 6.25 cents.
Tabb said options-quote providers were trying to address this problem by reducing demand for continual updates. "Most people select the quote they want to see, and then you go the market and find out what the price is and bring it back," he said. "That's fine. The problem is with streaming quotes, when people want to know on a second-by-second basis what the price of a particular security or option is doing."