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April 1, 2003

Vote Yes for Nickels?

By John A. Byrne Editor

When the dust has finally settled the question will not go away: Did the regulators go too far on decimal pricing? Did the introduction of decimal pricing -despite warnings it would lead to disaster unless the minimum increment was a nickel - destroy thousands of trading jobs? Fortunately, it does not require a Nobel Prize in Economics to find the answer. Dealers and other institutional pros are hurting because of government price controls. Decimal pricing eliminated jobs at dozens of market makers, including Knight Securities, Schwab Capital Markets, Merrill Lynch and other trading shops. But that is not what the government wants the public to know.

True, the bear market has slashed payrolls on Wall Street. And there is no disputing that decimals have brought some benefits. In July 1996, for instance, prior to the government's investigation of Nasdaq stock trading practices, the average Nasdaq spread was 30.78 cents. That compared with its chief rival, the NYSE, where the average spread was 16.14 cents. In recent months, both markets have recorded average spreads that are anorexic: 2.09 cents on Nasdaq versus 3.35 cents on the NYSE. But these rosy statistics, trotted out as propaganda to defend the government's botched handling of the decimal project, disguise a shocking reality: The continuing monkey business by penny jumpers, shenanigans on electronic trading systems, and a deplorable lack of institutional liquidity because of a 100 price points.

It is time for the regulators and lawmakers to pay attention when a venerable group joins the debate. The Investment Community Institute (ICI), the lobbying arm of the mutual fund industry, recently commissioned a study of this controversial penny pricing. Pennies, it concluded, have increased - not decreased - its members' costs. By extension, the ICI contends that decimals have raised costs for the individual investor, the folks who buy mutual funds. No trader with all his marbles is clamoring for the full-scale restoration of fractional pricing. "It'd be disastrous for retail investors, and trading-oriented shops would revolt," one buyside pro told me. "In short, it'll never happen." However, many are in favor of what some might call a sort of check-free federal emergency relief program: the introduction of nickels - that's five cents - as the new minimum price variation, or MPV, on at least some groups of stocks. "The nickel would reinstate liquidity," said one pro. "It's deserving of a debate," agreed another. "The problem with decimalization is not the format, but the penny minimum price variation," concluded a buyside guru. "There's no need for fractions at all."

I'm sure Artie Pacheco, the veteran Bear Stearns trading executive, who recently declared himself a candidate for chairman and chief executive at Nasdaq, would be amenable to nickels. He knows something. Artie was toasted by fawning fans at trading conferences over the past few months. Thousands who clicked on his name in a Traders Magazine Web site poll (, showed they would like to see him succeed Wick Simmons as Nasdaq chairman. So, if there is the same passion for nickels out there as there is for Artie - one of our own boys - thousands more will flood our Web site right away and click on the button that says, Yes to Nickels.

John A. Byrne