Nasdaq’s Decimals Narrow the Spread
Monday, the first day all Nasdaq stocks were traded in cents rather than fractions, the difference between what buyers bid and sellers asked for shares narrowed sharply--leaving less of a difference for middlemen to pocket.
That difference between the asking and selling prices on 25 stocks, known as the spread, narrowed by an average of 63% on Monday when compared with the five previous trading days, according to a study by market research firm Instinet Research. That is exactly what government regulators had hoped when pushing for the shift.
The move to decimals helps investors because they now can adjust their orders in increments of 1 cent instead of one-sixteenth, or 6.25 cents, regulators and exchange leaders have said. Share dealers, by contrast, have cautioned those benefits could be offset by factors such as higher trading costs resulting from the conversion.
“It could hurt if spreads narrow too much,” said Scott Saber, executive director in the equities division at UBS Warburg. “At what point are spreads too narrow that you cannot find liquidity?”
For example, a mutual fund trader, who could represent thousands of individual investors, might not be able to fill a large order because a matching order from the sell side could be a few pennies away, Saber said. Under fractions, where there were fewer price points, it was easier for buyers and sellers to find each other.
Of the 25 Nasdaq stocks looked at by Instinet, a unit of global news and information provider Reuters Group (RTRSY), the spreads on 24 of them narrowed.
The spread on Internet networking equipment maker Cisco Systems Inc. (CSCO), the most heavily traded stock in the informal study, fell 83% to 1 cent on Monday from the equivalent of 6 cents in the prior week. Spreads dropped to 1 cent on 11 of the 25 stocks including such well-known names as Microsoft Corp. (MSFT), Intel Corp. (INTC) and Yahoo Inc. (YHOO).
As expected, spreads for stocks with less volume did not benefit as much. Applied Microsystems Corp. (APMC) even saw its spread rise to 42 cents from 19 cents as only 500 shares traded during the whole day. StorageNetworks Inc. (STOR), which had the next lowest volume with 529,100 shares traded, saw its spread fall to 9 cents from 13 cents.
Government regulators demanded the move away from traditional fractions, believing it would cut investor costs through the narrowing spreads. Spreads on shares traded at the rival New York Stock Exchange and the American Stock Exchange, which have listed their stocks in decimals since the end of January, also have been narrowing, according to early studies.
But traders have warned that costs may rise since more manpower is required to trade stocks in cents because of the frequent price jumps. Wall Street pros say the price volatility has forced them to break up more of the larger stock orders into pieces to ensure speedy processing.
No technical problems related to decimals have been reported but market watchers have said the real test will come on a heavy trading day.
