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April 30, 2000

Lawmakers' Decimal Plan Could Be Risky

By William Hoffman

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  • Lawmakers' Decimal Plan Could Be Risky

A plan to simultaneously trade listed shares priced in decimals, and Nasdaq shares denominated in fractions, could unleash chaos in the nation's stock exchanges, according to the decimal project manager for the Securities Industry Association.

Yet despite requests from NASD officials that the July 3 decimal implementation be delayed, some lawmakers still wanted to push ahead.

The SIA's project manager John Panchery also expressed doubt about the technical side of the plan. "We don't even know that it's possible," he said.

Panchery said it would be "very dangerous" for the investing public and stock exchanges to trade thousands of securities in decimals and thousands of others in fractions.

Lawmakers Plan

The lawmakers proposing the bifurcated plan were led by House Commerce Committee Chairman Thomas J. Bliley (R-Va.), House Finance Sub Committee Chairman Michael G. Oxley (R-Ohio), and Rep. Edward J. Markey (D-Mass.), a senior member of the Commerce Committee. The lawmakers proposed that listed markets begin trading in decimals no later than Labor Day (Sept. 4), 2000, whether or not over-the-counter markets are ready.

"This will provide conversion of half our market, and provide inexorable momentum for the other half to convert," the congressmen wrote in an April 4 letter to Securities and Exchange Commission Chairman Arthur Levitt. "Delay is no longer acceptable," the congressmen wrote.

A separate alternative would see the SEC phase in decimal pricing on listed stocks, starting Sept. 4. In both situations, Nasdaq would not start trading in decimals until March 31, 2001.

Panchery said that studying the impact of dual trading on exchanges' capacity would go beyond the July 3 deadline. Bifurcation could adversely affect order routing and executions, he said. "You could wind up entering a trade without knowing whether it was trading in fractions or decimals," Panchery said.

Levitt responded to the congressmen's statement in a letter dated April 7. "Because of Nasdaq's delay, we must lift the April 14th and July 3rd dates set in our January 28th order," Levitt wrote.

The NASD on March 6 requested that the SEC postpone the scheduled start of decimalization. The request came after tests indicated its systems would not support the anticipated increase in trading volume that would result.

A spokesman for Rep. Markey said the bifurcation issue should be included in a pending study of decimalization from the General Accounting Office.

"We're obviously disappointed that things aren't moving forward more quickly to implement decimalization in the nation's stock markets," the spokesman said.

The congressmen complained to Levitt that fractional pricing of stocks costs investors an extra $1 million to $3 million a day. "Absent SEC blessing, this scheme would likely be illegal price fixing under the antitrust laws," they wrote.

The congressmen also told Levitt,"We believe no action should be taken on Nasdaq's supermontage proposal until that market is fully converted to decimals with free market increments of no more than a penny."