Commentary

Anne Plested
Traders Magazine Online News

Bottlenecks Ahead

Anne Plested, head of Fidessa's EU Regulation Change programme, has written a short blog arguing that although we should be thankful that ESMA have taken a pragmatic approach to moving things along, more bottlenecks could appear in the future.

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November 1, 1999

SIA Prepares the Markets for Decimalization

By William Hoffman

The expected Y2K problems should be history by the time traders switch from fractions to decimals next summer.

"We have a very aggressive schedule for getting us through Y2K and the remediation effort for decimalization," said Scott Abbey, chairman of the Securities Industry Association's decimalization steering committee.

Starting next July, stock prices currently quoted in fractional ticks, will be quoted in decimal increments.

"The last thing anybody wants to do is have any disruption in the U.S. equities markets resulting from this conversion," Abbey said.

Thus will Capitol Hill politicos be appeased. The decimal conversion was undertaken at their insistence, Abbey noted, since the rest of the world's major markets trade in decimals.

Critics charged that the United States' fraction-based system provided wider spreads on margins for dealers and market makers at the expense of investors. So when legislation was introduced in Congress a couple years ago to force the change, the SIA offered to organize a voluntary conversion instead.

Three Stages in Conversion

The change will happen in three stages. In July, a select basket of 30 to 40 stocks will begin trading in decimal prices. Assuming all goes as planned, in August all market and exchanges will begin listing stocks in five-cent increments.

By fall of 2000, Abbey said, SIA hopes to have IBM, General Motors, and Microsoft trading in whatever increment that market forces determine.

"We're not anticipating any snags," the SIA's decimalization czar said. "However, we're planning for any contingencies."

Next April and May, Abbey said, SIA will test firms to determine their readiness for the conversion.

A recent poll found member awareness of the looming deadline was high. A majority said they'd be ready to meet the schedule, according to SIA spokeswoman Margaret Draper.

The conversion could stress exchanges considerably, according to a forecast for SIA by SRI Consulting in Arlington, Va. Daily share volume was projected to rise nine percent for Nasdaq listed equities when stocks trade at a one-penny minimum price variation, the study found.

Trade volume could rise 81 percent, the SRI study concluded; quote volume on Nasdaq could grow 231 percent [see cover story].

That's one reason for the nickel-increment transition period in the second stage, Abbey explained. At that price point, the change from 1/16th of a dollar to a nickel involves just a couple extra price points per dollar. But even that much uncertainty has already attracted increased attention from the Securities and Exchange Commission, Draper noted. Some investors may wrongly translate $16-3/8 into $16.35 or $16.38. (Of course, $3/8 is the equivalent of 37.5 cents.) And when might the translation prompt SEC concerns about manipulation or price-fixing?

"I think everybody is working very hard on getting ready," Abbey said. He's hoping companies that spent the last couple of years averting a Y2K catastrophe will be more easily able to shift resources to decimalization. America may not be ready for the metric system, but Abbey and the SIA want to assure the markets are ready for the decimal system.