SEC Moving to Let NYSE Test Decimal Pricing

Slowly but surely, decimal pricing of U.S. stocks is on its way.

The Securities and Exchange Commission is preparing an order, likely to be issued in the next couple of weeks, that is expected to provide for the New York Stock Exchange to start its move to decimal pricing with a trial of about 50 stocks starting in September, SEC market-regulation director Annette Nazareth said.

SEC spokesman Chris Ullman described the concept outlined by Nazareth as “one of several options on the table.” He declined to discuss the others.

Nazareth said the SEC expects to let the NYSE convert all 3,000 of its stocks to dollars-and-cents prices in March, the same time that the Nasdaq Stock Market introduces decimal pricing for all 5,000 of its stocks.

The move to decimal pricing will end centuries of stock quotes in fractions, generally in increments of eighths of a dollar (12.5 cents) or sixteenths (6.25 cents).

Although The Times and many other newspapers already report stock prices in decimals, the move to trading in decimals requires a massive overhaul of Wall Street computer systems.

One goal of decimal pricing is to shrink the spread between “bid” and “asked” prices on individual stocks, potentially lowering investors’ costs.

The NYSE will let investors and trading floor specialists quote stocks in 1-cent increments both for the trial and the full-scale launch.

Nasdaq officials, however, have said that though their computers are capable of handling quotes in penny increments, they prefer to start quoting Nasdaq stocks in 5-cent increments.

Nasdaq would move to 1-cent increments around June 2001, they said.

The SEC’s decimalization plan comes after the agency pushed back its original July deadline for the introduction of decimal prices to accommodate computer-capacity problems at Nasdaq.

The new proposal means the two largest markets probably will use different quote spreads from at least September 2000 until about June 2001.

A Charles Schwab Corp. executive said the SEC’s approach “is a huge mistake.

“This will confuse individual investors and cause a tremendous surge in calls to their brokers,” said Schwab Vice Chairman Lon Gorman. “Investors are going to want to know, why can I buy IBM at $100 or $100.01, but I can only buy Microsoft at $100 or $100.05?”

The smaller decimal increments are expected to result in more quote traffic, which Nasdaq Chairman Frank Zarb said would have strained its computer capacity under the SEC’s original July timetable.

The NYSE, though, has said it is ready for the introduction of decimals. “We think this will be most beneficial to investors,” NYSE spokesman Ray Pellecchia said.

Nasdaq is using the interim to expand its computer capacity.

Rick Ketchum, president of the National Assn. of Securities Dealers, which owns Nasdaq, said Nasdaq is prepared to start quoting in pennies next March if that’s what the SEC wants.

“We can implement pennies should we be required to do so,” Nasdaq spokesman Scott Peterson said.

The SEC order incorporates the respective approaches sought by the NYSE and Nasdaq. The federal agency is trying to accommodate each market’s technical capabilities while advancing investors’ best interests, Nazareth said.

Schwab and other brokerages have urged the SEC to order a coordinated approach in which both the NYSE and Nasdaq start with the same increments, preferably nickels. SEC Chairman Arthur Levitt has been caught in the middle, though, because several influential members of Congress have pushed for the NYSE to introduce decimals for all its stocks in September.

“I wish the SEC would stop dragging its feet,” Rep. Edward J. Markey (D-Mass.) said Monday. “There’s no reason why investors in all NYSE-listed stocks shouldn’t be able to immediately get the benefit of narrower spreads.”

Congress’ research arm, the General Accounting Office, has found potential savings to investors of as much as $3 million a day from decimal pricing.

Ketchum said that although quotes will be in 5-cent increments, investors and dealers will be able to execute trades at penny intervals. Microsoft might be quoted in increments of $63 and $63.05, for example, but an investor could still place a “limit order” at a specified price of $63.03, he said.

Nasdaq’s lag on decimals will come at a time when it is a private, for-profit company owned by shareholders. The NASD plans to sell control of Nasdaq to brokerages, companies and institutional investors in September.

It is due to decide by the end of the year whether to make an initial public offering of Nasdaq stock.