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November 1, 1999

What the Pros Are Saying About Decimals

By Peter Chapman

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Aldo Parcesepe Sr. Managing Director OTC Trading Bear Stearns & Co.

Wider spreads? That's a possibility. I think that the forces of supply and demand will dictate whether [the minimum trading increment] will be rounded up or down. [Regulators] are making one assumption that it's going to be rounded down. It might very well be rounded down, but the costs that drive the marketplace are going to drive the rounding, not the fact that they pass a rule saying that [the minimum increment] must be a decimal. If people can't make money at narrower spreads then the spreads will widen.

I think the regulators would like for us to do business at a penny a share. The reality may be something different. As you decrease the commission base you get to a point where you can no longer make the overhead. At this point people will start walking away because they cannot support their business.

Ideally it might be nice to do business at a penny a share, but what kind of service would you get at a penny a share? You'd be getting service worth a penny a share.

Agency business? Anyone who tells you that [market makers] should be doing agency business is putting the cart before the horse. Institutions are accustomed to doing business on a net [spread] basis. Presently, Nasdaq does not provide a central location. Why should institutions pay agency commissions when they are not assured of price and time priority?

Dan Weaver Professor of Finance Zicklin School of Business Baruch College

With nickel increments we will see very little change. Maybe a slight narrowing of spreads. Marginally more people will trade. A slight increases in volume. The penny is a completely different story.

If we go to one cent we will see a reduction in quoted depth on listed markets. People will be reluctant to reveal their limit orders because other traders will step in front of them. They won't stop trading, they just won't reveal their orders to the public. They will be kept on proprietary systems and then sent in. We could also see an increase in volatility. Orders won't be there to absorb the price shocks.

This wouldn't be a problem if the NYSE allowed hidden' limit orders. But the SEC is against that. They wrongly believe that the order belongs to the market. All information is good. They're dead wrong.

I believe the NYSE and the American Stock Exchange prefer to see nickel increments. But the current environment is pro-competition. I think we will see penny ticks for a couple of years before the market centers come together and set minimum increments.

Payment for order flow? Decimalization will not eliminate payment for order flow. Market makers will partition order flow. They will keep the uninformed orders and send away the informed. Payments will probably be reduced. They were after the order handling rules came in.

Lawrence Scinto Senior Consultant SRI Consulting