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January 1, 2001

Decimals: Is the SEC Getting Cold Feet?

By William Hoffman

A Securities and Exchange Commission roundtable on decimalization in December may have been the start of industry moves to slow the transition from pricing stocks in fractions to pricing in decimals.

The roundtable's sprawling three-hour agenda, featuring introductory comments by Chairman Arthur Levitt and SEC director of the division of market regulation Annette L. Nazareth, "tells me there's probably a behind-the-scenes move to slow down decimalization," said Junius W. Peake, professor of finance, at the University of Northern Colorado. Peake was an early proponent of decimalization.

Robert Wood, professor of finance at the University of Memphis, agreed that the roundtable could be a go-slow signal. "I just don't think it's going to sell," added Wood, who conducts research on the progress toward decimalization.

"Whoever tries that [slowing down the introduction of decimal pricing] is going to have to tangle with Congress," Wood said. Decimal champions Rep. Mike Oxley (R-Ohio), Edward Markey (D-Mass.), and Thomas Bliley (D-Va.) were all re-elected on Nov. 7. "Congress has been put off too many times already, and probably isn't in the mood to be put off again," Wood said.

Wood and Peake presented no evidence for their suspicions, however.

Nasdaq Commitment

John Panchery, Securities Industry Association decimals project manager, said Nasdaq recently reaffirmed its commitment to converting all trades to decimals. "It's aggressive," he acknowledged. "This is something we have to watch."

Peake said he could understand SIA's watchfulness: "That's a hell of a lot of stocks [to convert] in a very short time." Further, he said, "If someone told me we needed eight weeks to convert Nasdaq instead of four, I could wait for that. If they wanted two years, then I might have a problem."

However, the transition appears to be going smoothly, according to Wood, the professor of finance at the University of Memphis. Atomic Tangerine, a consultant in Menlo Park, Calif., hired by the SIA, agrees.

Panchery said Atomic Tangerine reported a 35 percent increase in quotation activity since the transition started in August. As Nasdaq moves to decimalization, he added, SIA anticipates a significant increase in message traffic. "Time will tell whether we have to increase our bandwidth" to meet the expected surge in communications traffic, he said.

Ray Pellecchia, a spokesman for the New York Stock Exchange, also said the transition "has been going smoothly." The NYSE converted another 94 issues to decimal pricing on Dec. 4, he noted, "to make sure more traders have exposure before completing our conversion on Jan. 29."

Surprise Developments

Wood noted some unexpected developments from his data. For example, big trades that used to move in several large tranches are increasingly broken down into numerous smaller tranches. If this trend continues, he said, it could require more back office labor to complete trades. "It's a very subtle thing that no one had anticipated, but it could be a very vital issue, because clearing could cost a lot more," he said.

The most dramatic change has been the reduction in spreads, Wood said. When he told an SIA conference in November that 66 percent of America Online spreads had narrowed to five cents or less, Wood said AOL's floor specialist challenged his figures. The specialist was "incredulous" when the professor showed him his statistics. "I would say there's high drama there," Wood said.