NYSE Warns Against ‘Sub-Penny’ Pricing

The New York Stock Exchange said its switch to decimal stock prices has had mixed results for investors and warned that it would be unwise for U.S. markets to move to price increments of less than a penny.

“Decimalization has involved substantial costs, and these would increase with still smaller minimum price increments,” NYSE Chief Economist Paul Bennett said in a letter to the Securities and Exchange Commission.

The SEC has been seeking public comment since July about the effect that sub-penny trading would have on markets. Island ECN and some other electronic trading networks that compete with the NYSE have been pushing for use of sub-penny increments, although many brokerages and big investors oppose it.

U.S. markets switched to decimal pricing from fractions earlier this year, after years of hounding by Congress. The idea was to make stock prices easier to understand and to narrow the difference, or spread, between stocks’ bid and asked prices, thus saving investors money.

The Nasdaq Stock Market, the NYSE’s chief rival, said in June that its spreads had narrowed 51%, on average, as a result of decimals.

Bennett said the switch to decimals from fractions on all NYSE stocks in January narrowed the spreads between buying and selling prices by 43%.

Still, most NYSE trades have occurred at spreads larger than 1 cent, “indicating that further gains from moving to sub-decimals would be very limited at best,” he wrote.

What’s more, narrower price spreads under decimal pricing have hurt brokerage profits and financially weakened some stock dealers, critics say.

The NYSE said moving to sub-penny pricing could boost the number of quotes in the system, but that in turn would require additional infrastructure and could thus raise trading costs. At the same time, Bennett said decimal pricing has reduced the number of shares investors offer to buy or sell at specific prices. That has reduced the “visibility” of investors’ true interest in a stock, the NYSE said.