SEC Moves Toward Decimal Prices in 5-Cent Increments

The Securities and Exchange Commission staff is preparing a directive that would let the nation’s exchanges begin their conversion to decimal pricing of securities in nickel increments.

The order, which may be ready for the commission’s consideration in February, will address concerns that penny increments would create more quote traffic than existing systems can handle, said SEC spokesman Chris Ullman in Washington.

The concern is especially keen in regard to put and call options, which generate more quotes than regular stocks.

“We’re acutely aware of those concerns,” Ullman said. “So the order we’re considering doing would allow them to do nickels first . . . with the potential to do pennies later.”

If approved by the commissioners, the order would give a green light to Wall Street’s chief trade group, the Securities Industry Assn., which first recommended the use of nickel increments at the outset of the historic conversion from pricing securities in fractions to pricing in simple decimals.

The SIA recommends that 30 to 40 stocks trade in nickel increments beginning July 3, with all remaining stocks switching to nickel increments between Aug. 7 and Sept. 29.

The plan would then let securities trade in whatever increments the market bears starting Oct. 2.

Although other key markets worldwide have already moved to decimal pricing, U.S. stocks have continued to trade in fractions. Most issues now trade in increments of a sixteenth of a dollar, or 6.25 cents, though some very heavily traded stocks trade hands in increments as small as sixty-fourths or less.

Pacific Exchange spokesman Dale Carlson said even pricing in nickel increments could overwhelm existing quote systems.

“It’s not as big a concern 1/8as pennies 3/8 but it’s still a concern,” Carlson said. “Remember, for every stock listed on the options side there are numerous puts, calls, expiration dates and strike prices.”

The SIA disagrees.

“We’ve had our technical people looking at this issue, and I think we’re ready to proceed,” SIA spokesman Dan Michaelis said.

There’s more at stake in the discussion of trading increments than whether electronic quote systems will be overwhelmed. Some traders argue for nickel increments because they say pennies would result in more volatility as professional traders quickly jump ahead of amateur investors’ orders.

Many regulators and academics, meanwhile, counter that pricing in penny increments would further narrow the “spread” dealers quote for stocks--the difference between the best buying price and best selling price. Narrower spreads would save investors money.

“Decimalization is going to have a profound impact on our business,” New York Stock Exchange Chairman Richard Grasso said Tuesday in remarks carried on CNBC-TV. “It will shrink spreads. It will produce, I think, a stock table far more easily read by consumers, and many believe it will produce much greater volume on this exchange.”

Ullman said the order being prepared for the SEC’s consideration would also require the nation’s exchanges to work together on the conversion. If approved, it will likely quell anxiety at some exchanges that by planning the conversion together, they could run afoul of antitrust laws.

“The commission would be giving the industry its imprimatur to create a plan and implement it,” Ullman said.

The Justice Department has already assured the exchanges that talking to each other about decimal conversion would be legal.

“We would be more comfortable, though, if we also had 1/8an assurance 3/8 from the SEC,” said Charles J. Henry, president of the Chicago Board Options Exchange.