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July 31, 2003

An SEC Turnaround on Decimals

By Gregory Bresiger

The SEC is now ready to "listen politely" to the arguments of the trading industry on decimalization. The latest evidence of this comes in a letter - sent as Traders Magazine was going to press - from SEC Chairman William Donaldson to the Security Traders Association.

After noting that a number of studies have shown that decimalization has lowered spreads, the Donaldson letter also conceded that decimalization has a down side.

"Nevertheless, the Commission has long recognized that the shift from fractional to decimal prices has the potential to influence market dynamics and trading behavior in ways that could affect transparency, liquidity and fairness of markets," according to Donaldson.

"In particular," Donaldson continued, "several post-decimalization studies have indicated that the narrowing of quote spreads following decimalization also appears to have been accompanied by some reduction in the liquidity reflected in these quotations. This apparent reduction in liquidity has the potential to increase trading costs for institutional investors, such as mutual funds and pension funds, when they seek to affect large trades in stocks," Donaldson said. And that, Donaldson concludes, could have an effect on retail investors who rely on institutional funds for retirement. [See Special Feature on decimals.]

STA officials said they were pleased by Donaldson's letter, which was in response to a letter on decimalization they sent in May.

"It was polite. He is listening to us," a spokesman for the STA said. Privately, STA officials said that the SEC leadership seems to be much more interested in the problems of the trading industry than previous administrations. Several trading executives had complained that Arthur Levitt, the SEC chairman who served under the Clinton administration, was hostile to the trading industry.