Narrowing the Spread
The Intermarket Trading System, a group of all U.S. stock markets, agreed to a computer upgrade that will allow trading in sixteenths of a dollar for all New York Stock Exchange-listed stocks, the ITS said Monday.
The $30,000 upgrade, to take effect June 23, will put competitive pressure on the NYSE to modify its opposition to trading stocks in increments narrower than the traditional eighths of a dollar.
Finer trading increments are expected to improve individual investors’ opportunity to buy and sell stocks at better prices, by allowing for a narrower “spread” between the bid and asked prices for stocks.
The governing committee of the ITS, which allows brokers and stock-exchange floor specialists to gain access to the best available stock prices from any exchange, voted unanimously Monday to change its computer capability, ITS Chairman Allan Bretzer said.
The NYSE, alone among the exchanges in opposing a move to narrow the increments, could have vetoed the plan but did not, he said.
The ITS computers now allow trading in eighths, or 12.50 cents. The move to sixteenths will allow for pricing in increments of 6.25 cents.
The ITS will meet again May 27 to decide on another upgrade that would allow for trading in 1/256 of a dollar or in decimals, or both, said Bretzer, Chicago Stock Exchange senior vice president. The ITS asked the Securities Industry Automation Corp., a unit of the NYSE and American Stock Exchange, to develop cost and implementation scenarios for these options, he said.
The ITS’ plans will create a technical capability but won’t compel the NYSE, the nation’s largest stock market, to adopt narrower increments.
NYSE spokesman Ray Pellecchia said the Big Board approved Monday’s plan because “we support the right of alternative markets to pursue whatever market initiatives they deem appropriate.”
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As for whether the Big Board itself will move to sixteenths, Pellecchia said, “We’re studying the impact on investors of any move we might make and will make a decision soon.”
The Pacific Exchange, which has trading floors in San Francisco and Los Angeles, is among the exchanges moving to sixteenths.
“The NYSE is going to be hard-pressed to be the only guy on the Street trading in eighths when everyone else is in sixteenths,” Pacific spokesman Dale Carlson said.
Pressure on the NYSE has been building for weeks. The Amex, the nation’s third-largest stock market after the NYSE and the Nasdaq Stock Market, obtained Securities and Exchange Commission approval last week to trade in sixteenths.
Meanwhile, Nasdaq has applied for similar approval. But many smaller, lower-priced Nasdaq stocks already trade in sixteenths or even smaller fractions.
The idea behind the ITS computer change is to allow any stock to trade in sixteenths if a market approves that increment.
Two of the biggest “third-market” brokers of NYSE-listed stocks, Bernard L. Madoff Investment Securities and Trimark Securities, also have started to quote stocks in sixteenths.
Third-market brokers match buy and sell orders internally before processing them on a national market such as Nasdaq. Instinet, the largest private trading system in the U.S., already allows trading in increments as fine as 64ths.
Academics, regulators and exchange officials expect stock bid-and-asked spreads to narrow with the finer trading increments, to the benefit of institutional and individual investors.
“Savings [for investors] could be as much as $3 billion” annually, said Junius Peake, a professor of finance at the University of Northern Colorado. That money would come from the pockets of broker-dealers and stock-exchange floor specialists who naturally earn more when spreads are wider.
“Trading is a zero-sum game,” said Samuel Hayes, a professor at Harvard Business School. “The winners are the investors. The losers are the vendors.”
