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May 31, 1998

Congressmen Claim a Victory In U.S. Decimal Stock Switch

By Jeffrey L. Winograd

A decimal-based U.S. stock system has moved one step closer to becoming a reality perhaps in the summer of 2000 thanks in part to the unrelenting efforts of Rep. Michael Oxley (R-Ohio) and Rep. Edward Markey (D-Mass.).

Holding a new General Accounting Office (GAO) report in one hand and a ream of letters from four exchanges, the National Association of Securities Dealers and the Securities and Exchange Commission in the other a triumphant Oxley announced at a Capitol Hill hearing that opponents of decimalization have been brought to their knees.

"With this, we will have completed our goal of bringing competition to stock pricing, modernizing the markets to the benefit of all investors," said Oxley, chairman of the House Commerce Subcommittee on Finance and Hazardous Materials.

Experts Agree

Many industry experts now agree that U.S. stock exchanges will switch from fractions to quoting stock prices in decimals sometime in 2000. The SEC is hoping for a July 2000 switch. September 2000 was the target date agreed upon during a private Feb. 27 meeting by a working group of equity and derivative market representatives in Washington.

The New York Stock Exchange said it is on target to quote in decimals by year's end. The Cincinnati Stock Exchange is planning to be ready by April 1999. And the Pacific Exchange said it will have all necessary systems finished by the end of September 1999.

The NASD and the American Stock Exchange appear to be dragging their heels. The NASD said it is committed to being ready in early 2000, while the AMEX is committed to a conversion in September 2000.

Technology Adjustments

The GAO report noted that the technology adjustments necessary to support a decimal-based pricing system are straightforward and relatively inexpensive. A study by the Newton, Mass.-based Tower Group, commissioned by the Securities Industry Association, estimated the systems changes at almost $170 million.

However, the report concedes that the technology concerns about Year-2000 computer remediation and the 1999 conversion to a single currency in much of Europe pose substantial barriers to decimal trading before 2000.

SEC Chairman Arthur Levitt, in a May 8 letter, stressed that the move to decimals is essential for keeping U.S. markets competitive with foreign markets.

But Levitt warned that a move in advance, or simultaneously, with Year-2000 testing would be imprudent. In addition, firms are working to comply with the NASD's Order Audit Trail System and the European currency switch.

The SIA is coordinating industry-wide conversion efforts, and legislators plan to study the SEC oversight of the massive project.

Common Cents

Oxley and Markey, with House Commerce Committee Chairman Rep. Thomas Bliley (R-Va.), began a legislative drive to mandate decimalization when they introduced the Common Cents Stock-Pricing Act last year. Passage of the bill would be moot if the industry itself moves voluntarily to a decimal system.

The Security Traders Association said it is pleased with the current developments. "I think all market participants are committed to producing the most competitive prices for investors, and we are convinced that competitive forces will ultimately produce the most competitively-priced markets, which is Oxley's objective," John N. Tognino, president of the STA, told Traders Magazine.