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July 31, 2003

The Summer of Our Discontent

By John A. Byrne Editor

A buyside trading industry activist recently lashed out at an editorial in this page that criticized the current policy on decimalization. In retrospect, it seems as if Harold Bradley's polemic, which took the view that this policy is good for markets, does not have widespread support. Decimalization critics abound on both the buyside and sellside. Indeed, Bradley's may be a rather lonely and isolated voice. As this month's Traders Magazine makes it clear, traders on both sides are at a breaking point. Another prominent buysider, Andy Brooks of T. Rowe Price, is quoted in our Special Report, saying decimalization is not helpful in large stock trade executions. He would support a minimum price variation of a nickel - heresy to Harold Bradley - to reduce liquidity problems triggered by penny increments. Now it must not be overlooked that American Century, where Bradley has held various senior posts and once led the trading desk, is a major user of ECNs, especially for Nasdaq executions. For the longest time, Bradley's men made no secret of their professional distaste for market maker intermediaries. Bradley is, therefore, a hostile witness in the controversial case of decimalization versus the dealer markets.

So while we are at it, here's another distressing fact: The specialist community on the NYSE is taking a hammering because of the imposition of penny pricing. Leaving aside the heated complaints about penny jumping on the Big Board for another day, the fact is penny pricing has - literally overnight - obliterated a massive chunk of profitability at specialist firms on the NYSE. What else might explain their plummeting after-tax profits: $58 million in the first quarter on revenues of $279 million, compared with after-tax profits of $99 million on revenues of $414 million a year ago, according to the Big Board. That's a return on capital of 5.2 percent in the first quarter compared with 9.2 percent a year ago.

In this issue, we have devoted many pages to decimalization. It includes the Special Report, followed by two excellent opinion pieces from experts on both sides of the debate - Artie Pacheco and Professor Junius Peake. In between there is a thought-provoking Q&A with Larry Harris, Chief Economist of the Securities and Exchange Commission. Harris has some critical comments on decimalization policy. Finally, decimalization plays no small part in the future of the Nasdaq Stock Market. As its President and CEO Robert Greifeld undertakes some difficult decisions, Traders Magazine took a closer look at what some of these changes mean for traders. And we examine whether Nasdaq will make a comeback. Could the SuperMontage actually succeed?

John A. Byrne Editor