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February 1, 2000

Decimal Prices on the Backburner?

By William Hoffman

Wall Street's plan to switch to decimal pricing this year could be sidelined by lack of preparation.

Rep. Vito Fossella (R-N.Y.), who is pushing the industry to prepare for the switch, said he may ask securities exchanges to extend the deadline for implementing decimal pricing.

He said he will take this step if Wall Street leaders reiterate, during Congressional hearings he has scheduled, concerns on preparation.

Fossella said almost every securities industry pro he has talked with has expressed concern about whether the industry is ready for the conversion from trading in fractions to trading in nickels and cents. He would not identify any of the participants but said that they included officials from stock exchanges and broker dealers and traders.

"When you hear statements like that [expressing concern], I think it's appropriate to bring the major players forward to ask, Hey, is the industry ready or not?'," said Fossella, a member of the House Subcommittee on Finance and Hazardous Materials, during a telephone interview. (He is also the House point man on securities reform legislation. See related story on SMEA, page 8).

Delay Possible

Fossella said he hoped a delay would not be necessary, but "it would be in the range of possibilities. Everything has got to be on the table."

No decision has been made on Fossella's late-December call for decimalization hearings, said Peggy Peterson, communications director for House Finance Subcommittee Chairman Mike Oxley (R-Ohio).

Oxley has long been a champion of decimalization. Peterson pointed out that Oxley and Rep. Edward Markey (D-Mass.) proposed a bill in 1997 directing the Securities and Exchange Commission to examine the issues involved in moving the nation's exchanges to decimal pricing. But the industry subsequently adopted its own plans for decimalization, she noted. The bill was allowed to lapse.

Peterson refused to speculate on what Oxley's committee might do if lack of preparation for decimalization is repeatedly mentioned during hearings.

The Securities and Exchange Commision has instructed Wall Street to begin quoting securities prices in decimals by July 3, 2000. A plan by the Securities Industry Association would allow a five-week period, starting on July 3, for implementing decimal pricing on a pilot program of 30 stocks. These stocks would switch to trading in minimum increments of five cents, or to a minimum increment of a penny, for issues that trade in thirty-seconds or sixty-fourths. The SIA plan calls for all stocks and options to be traded in decimal prices, starting in August.

Dan Michaelis, spokesman for the Securities Industry Association said the trade group "would not recommend going forward with its decimalization plan if we were not ready."

Public Platform

Michaelis said the industry welcomed any congressional hearings as "a good public platform" for investor education on decimalization. Preparations for the Year 2000 computer problem had many securities industry groups working closely, he noted, so exchanges, market-makers, and traders should be ready for the change.

Peterson expressed confidence in the industry: "I think [decimalization] is really going to be a very positive change for American markets and for U.S. consumers."

Fossella said, "Everybody who is going to have a role in the conversion to decimals should have a place" at his proposed congressional hearings.

If industry representatives express confidence that the process can go ahead without undue risk, he said, then the conversion should proceed as planned. "But if there are people who are not ready," he added, "then we need to know who they are, and why they are not ready yet."

Dollars and Cents

For more than two centuries, stocks in the U.S. have been valued in fractional price increments. Today, the minimum price increment is 1/16th of a dollar. The U.S., prodded by Congress, will soon join most of the world's other securities markets, quoting stocks as well as options in decimals. That would mean, for instance, price increments of two decimal prices such as $0.05 or $0.01. (Increments smaller than the standard 1/16th are possible on some electronic communication networks but not on a U. S. stock exchange.)

Conversion Table

1/32 = .03125 5/32 = .15625 9/32 = .28125

1/16 = .0625 3/16 = .1875 5/16 = .3125

3/32 = .09375 7/32 = .21875 11/32 = .34375

1/8 = .125 1/4 = .25 3/8 = .375