SEC Weighs Decimal Stock Pricing System : Securities: Critics say converting from the current fractional method might cost ‘several hundred million dollars.’
The Securities and Exchange Commission is studying the possibility of changing price quotations on U.S. stocks from dollars and fractions to dollars and cents, though agency Chairman Richard C. Breeden said Wednesday that the conversion is “not on my personal agenda.”
Advocates of such a change believe that switching to a decimal pricing system would benefit investors by narrowing the “spread” between the buying and selling prices offered by market makers. Opponents contend that conversion could hurt securities firms and, as a result, reduce the liquidity of certain stocks.
“If there is a public demand, which I don’t believe there is, we would go for it, but to change something just to change it is probably wasteful,” said William H. Donaldson, chairman and chief executive of the New York Stock Exchange.
Donaldson, in Dallas to deliver a speech, was responding to questions generated by an article about the possibility of a change in Tuesday’s Wall Street Journal. He estimated that conversion to a decimal system would cost “several hundred million dollars” in systems and other expenses.
Under the system now, U.S. stock prices are quoted in fractional increments, with 1/8 of a dollar--or 12.5 cents--being the typical minimum increment. Under a decimal system, the minimum increment could be as little as a penny.
SEC spokeswoman Mary McCue, also responding to the Journal’s article, said that converting the 200-year-old fractional system to a decimal system “is a very low priority for us.”
Speculation about a change to the decimal system, which is used in European and other overseas exchanges, began last week after Kathryn Natale, an assistant SEC director of market regulation, asked the Securities Industry Automation Corp. to study the costs and feasibility of conversion. The SIAC runs the centralized quotation system for U.S. stock exchanges.
“This is not a new issue,” said Bernard L. Madoff, head of a New York-based firm that makes markets in stocks in competition with the major exchanges. “Decimal pricing has been discussed on and off for years. It always seems to resurface for one reason or another.”
Advocates of the decimal system say the fractional system enforces unduly large spreads that can no longer be justified given computerized trading technologies. The fractional system “is an anachronism,” said Joseph Grundfest, a professor of law at Stanford University and former SEC commissioner.
“From a systems standpoint, a decimal system is certainly feasible,” Madoff agreed. “The bigger question concerns the impact on the profitability of different segments of the industry. My own view is that tighter spreads would add to liquidity and trading volume. (But) there is a point where the spreads could become too narrow, and that could discourage market makers from taking risks.”
Besides, added Brad Weeks, senior vice president for equity trading at Donaldson, Lufkin & Jenrette Securities, institutional shareholders already can get spreads narrower than 1/8 by using a technique called “average pricing.”
