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May 31, 2003

STA Says Decimals Have Hurt Investors

By Gregory Bresiger

The Securities Traders Association wants to return to a time when the trading industry wasn't hurt by the use of decimals.

"We believe that the introduction of decimalization, although well intended, has increased investors' costs, reduced transparency, increased volatility, and diminished the visibility of liquidity," John Giesea, president and chief executive officer of the STA, wrote in a letter to William Donaldson, the new chairman of the Securities and Exchange Commission. Active fund managers have seen their trading costs rise by one percent to two percent of assets, the STA said, citing an academic study.

"The goals of moving to decimals from fractions were clearly well intended...They were intended to narrow spreads, with the expectation that they would generate a significant saving for investors," Giesea continued. But he wrote that decimals have created "unintended consequences." These include hardships for market makers, specialists, those risking capital in providing liquidity as well as increased costs for investors. Giesea warned that, "Action must be taken soon to remedy what could soon be a capital formation crisis."

Is there any chance of the trading industry returning to fractions? Giesea and the STA, are betting that Donaldson was serious when he was recently quoted in a Reuters wire service report as calling for a complete re-examination of the impact of trading in decimals. However, at the STA's Washington conference, a key lawmaker was asked about ditching decimals. "We're not getting rid of decimals," said Michael Oxley (R-Ohio), chairman of the House Financial Services Committee.