SEC Official Puts In His 12.5 Cents’ Worth on Stock Pricing

Securities and Exchange Commissioner Steven M.H. Wallman on Wednesday urged the U.S. stock markets to start expressing share prices in decimals rather than fractions by January 1999.

Wallman said in a speech that decimals are easier to understand than fractions and would lead to more favorable prices for investors by increasing trading competition.

“I call for the markets to get on with the business of trading in what I call ‘plain numbers’--dollars and cents--instead of fractions, and to do so as soon as possible,” Wallman told a conference at Pace University in New York.

Wallman, one of four SEC commissioners, said that if the markets don’t voluntarily switch to decimals, the SEC or Congress should study the issue and require the change. The conversion should coincide with efforts to update trading software that can’t recognize any year after 1999, he said.

Trading on U.S. stock markets is typically in minimum increments of an eighth of a dollar, or 12.5 cents. Under a decimal system, the increments would be in pennies. Stocks actually can trade in increments as small as 1/64, though in practice trading in less than 1/8 happens infrequently.

Wallman said “mental gymnastics” are often required to compute trading profit with fractions and that many investors are “put off” by the current system. “In that regard, [changing to] decimals is the only right step,” he said.

He said the first stock market to adopt decimals “will surely show itself to be a market for the next century.”

The heads of the leading U.S. stock markets immediately raised questions about the costs of switching to decimal trading, the feasibility of making the change in less than three years and the effect on stock prices. But they left the door open to decimal trading as a way to compete better internationally.

“What’s going to drive this is getting into international business,” American Stock Exchange Chairman Richard Syron said.

Joseph Hardiman, chief executive of the National Assn. of Securities Dealers, which runs the Nasdaq Stock Market, said decimal trading is “best left for competition, not regulation, to resolve.”

However, he added, “I do believe that some time over the next decade the markets will have decimalization, but it will be brought by competition overseas and by new trading systems domestically.”

Wallman has previously praised decimal trading without pressing it as forcefully and specifically as he did Wednesday. He said after his speech that he hadn’t discussed the proposal with the other SEC commissioners.

The SEC, in soliciting public comment last fall on its order-handling rule proposals, also sought feedback on decimal pricing.

In the past, dealers have voiced concern that decimal prices would reduce market liquidity by sapping traders’ profits and that a system conversion could cost hundreds of millions of dollars. They also cited the performance of U.S. markets and questioned the need to tinker with success.

A.G. Edward & Sons Inc. of St. Louis is one securities firm that has supported decimal pricing.

“The whole world is in decimals,” Chairman Benjamin Edwards said Wednesday. “We’re sitting by ourselves.”