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May 31, 2000

Soaring Nasdaq Market Botched Decimal Plans

By William Hoffman

Nasdaq's painful march from fractional to decimal-based stock trading ultimately was caused by a soaring stock market.

While some traders may disagree, a senior executive at Nasdaq reaffirmed the root cause at the annual STA Congressional Conference.

"Nasdaq has been one of the real supporters of decimalization from the very beginning. But some incredible things have happened along the way," Patrick Campbell, chief operating officer at Nasdaq, told attendees.

Volume on Nasdaq jumped from an average of 780 million shares a day in 1998 to 1.75 billion shares a day in the first two months of 2000, Campbell noted. "It truly is staggering," he said.

Pulled the Plug

In April, SEC Chairman Arthur Levitt pulled the plug on the original plan to introduce decimal stock trading in July, citing unprecedented volume and volatility in the markets.

Many pros directly cited Nasdaq's computer network, plagued by breakdowns, as the real reason for Levitt's abrupt decision. The National Association of Securities Dealers had earlier requested postponement, saying the scheduled beginning in July could overload its systems.

In a move that likely embarrassed NASD officials, Island ECN on April 19 announced it would be ready for decimals on July 3.

Rep. Mike Oxley (R-Ohio), the chairman of the House subcommittee on finance and hazardous materials, lauded Island, which controls a large share of Nasdaq orders, as "the first real move toward decimalization."

Island's plan would reduce customer confusion, highlight the ability of technology to handle volume, and encourage a smooth transition to decimal pricing, Oxley said.

Island's experience could provide important lessons to ease the conversion for others, he said.

"Make no mistake," Oxley told traders at the conference, "decimalization will be part of the landscape sooner rather than later."

Oxley sounded upset by Nasdaq's footdragging on decimals. He had come before the STA's congressional conference each of the last three years to affirm that decimalization was "inevitable." This time, he added, "Inevitable doesn't mean imminent, certainly not in Washington."

Annette Nazareth, director of market regulation at the SEC, said the agency "remains committed to implementing decimal pricing in a timely and orderly manner."

"Everything is on the table now," Oxley told the STA crowd. That could include a transitional period of pricing in nickel-increments. "We expect to have a clear map of how to get there [very soon]," Oxley said.

Alternatives under review included delaying decimalization to Labor Day 2000, or letting some stocks or exchanges such as Nasdaq go to decimal priced trades ahead of others.

Crippling the Computers

The STA audience, and the other speakers, appeared ready to wait. Traders want assurance that the expected rise in volume under decimalization won't cripple computerized systems.

Sen. Rod Grams (R-Minn.), a member of the Senate Banking Committee, said exchanges, regulators, and Congress should strive to set a new, "realistic" deadline for the conversion, and then stick to it.

But "doing the conversion right is more important than doing the conversion quickly," Grams said.

But some in the audience, while expressing support for the concept of decimalization, also questioned the rationale for it. "Who's really pushing this?" asked one attendee, who declined to be identified.

The attendee claimed that even large institutional traders said they weren't lobbying to make the switch. These are said by some experts to have the most to gain from decimal pricing because penny-priced trades could mean slimmer transaction costs.

Oxley said, "I'm confident we're going to get this ball across the goal line. Let's join the rest of the world in trading in something other than pieces of eight."

Follow the Leader

Yet another attendee, who also requested anonymity, later compared the decimalization push to the failed efforts to convert U.S. measuring systems to the metric model.

The attendee suggested that U.S. exchanges, as the world's market leaders, should not have to switch. Perhaps world markets should switch to fractions, the attendee said.