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December 1, 2001

Forget Subpenny Trading, NYSE Says

By Gregory Bresiger

Put the New York Stock Exchange down as another securities group that has told lawmakers and regulators to jettison sub-penny trading.

In a three-page letter to the Securities and Exchange Commission, Jim Buck, corporate secretary for the NYSE, commented on the effect of decimal trading in subpennies.

"We believe that there should be a national minimum price variation (MPV); that the variation should not be lower than one cent; and that order entry, quotations and trade executions should not occur in subpennies," NYSE officials wrote in a recent letter to the SEC.

Trades Increase

Big Board officials complained that, since the switch from sixteenths to a penny MPV, the NYSE has experienced, "a 76 percent increase in trades, a 129 percent increase in quotes and a 106 percent increase in system orders, with a 24 percent increase in the rate of cancellation of system limit orders."

NYSE officials argued that these post-decimalization numbers would dramatically increase if trading began in sub-pennies.

"In addition to exacerbating price discovery concerns relating to display size, inclusion of subpenny orders in quotes would most certainly result in rapidly changing or flickering quotes, as well as a substantial increase in locked or crossed markets on display montages," according to the NYSE letter.

Critics have argued that - although subpenny trading might result in execution price reduction - any savings would be eaten up by increased broker dealer processing costs caused by multiple executions.

"The minimum for order priority and stepping ahead," according to the NYSE letter, "should both be no less than one cent MPV [minimum price variation], regardless of market participant classification."

"Subpenny increments most likely would deter the entry of limit orders and increase their cancellation rates," the NYSE said.

"In addition, the added frequency of very small price changes would frustrate compliance with short sale regulation," it added.

The Security Traders Association has also opposed subpenny trading.

In a letter this past summer, it also contended that trading in subpennies would complicate decimal trading.

U.S. Currency

"By severing the connection to the U.S. currency," STA officials wrote, "sub-penny trading completely undermines the common sense basis for the decimal conversion and leads to a more confusing price structure than ever before.

"Would the average investor be more likely to understand a price of 103/8 or one of 10.369759139?"

"We believe," STA officials wrote, "that sub-penny trading would reduce security prices to a series of indecipherable numerical sequences extending out several decimal places to the right of the decimal point."

SEC officials said they are reviewing the comments.