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December 1, 2003

Retail Dangers In Subpennies

By Gregory Bresiger

The individual investor doesn't realize how the increased use of subpenny trading is hurting him, Nasdaq officials warned. But Nasdaq's argument, made in a filing with the SEC, is ironic.

That's because in the same filing, in which Nasdaq officials detail the dangers of subpenny trading, they asked for the authority to use it to protect themselves against nimble competitors.

"Subpenny quoting does not benefit all investors and has the perverse effect of decreasing price competition," wrote Nasdaq in a filing that came from the office of general counsel Edward Knight. Nasdaq said that subpenny pricing, which is growing, now accounts for some 16 percent of all trades in Nasdaq securities.

Nasdaq noted that it accepts quotes in penny increments and orders in subpenny increments up to four decimal places. It truncates their prices to two decimal places and does not rank or display them by subpennies. Subpenny prices are often not displayed in some places, Nasdaq said. Many market participants, especially new electronic players, will execute orders to the subpennies, but the market displays to the penny.

Flickering Quotes

Nasdaq contends that subpennies enourages "stepping ahead" as well as "flickering quotes." The solution? The SEC should require a minimum pricing increment (MPV) with the exception of average price trades. Without an MPV, Knight warned, Nasdaq will be forced to compete on the basis of current policy. Indeed, Nasdaq said it is now "compelled to propose a subpenny quotation increment" in order "to remain competitive."