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November 1, 2000

Give Decimal Technolgy A Chance, Professors Say

By William Hoffman

People, not machines, are why decimal pricing has been delayed, according to two market academics.

The infrastructure of telecommunications, computer hardware and software necessary to make decimalization work "has been ready for 25 years," argued Junius Peake, professor of finance at the University of Northern Colorado. "What we need is the political will and the regulatory smarts to get out of the way."

Sea Change

"What we're seeing is a sea change in trading technology," added Robert Wood, professor of finance at the University of Memphis, who is conducting research on the markets' transition to decimal pricing.

"There are too many traders living in the past, and that world is just vanishing," said Wood, who advocates more trader education on decimal-based trading. "Those who trade in the old way, try to find liquidity in the old way, and they're going to be hurting," Wood said.

Decimalization is "only a quarter-century overdue," added Peake. (Peake and two colleagues made a proposal in 1976 to change the fractional-based U.S. equity pricing system to decimals.)

Transition Plan

The second phase of decimalization was under way in late September, with the addition of more than 100 New York Stock Exchange-listed equities. That reportedly had some floor brokers complaining about a lack of liquidity at each price point in the additional stocks. The transition is scheduled to continue through next April.

By that time, Nasdaq should have completed the technical upgrades it argued were necessary to avoid problems.

That argument, earlier this year, won Nasdaq an extra year for its transition.

However, Peake predicted that stock exchange managements will soon claim that they need more time. He noted that investors were conspicuously absent from invitations to the NYSE's Nov. 1 meeting to assess the first 60 days of its decimalization pilot program.

Wood said one short-term effect of the transition has been to increase liquidity in the market. "There's more liquidity in one sense," Wood said, "but it's being offered in different ways."