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April 1, 2004

Under Inspection, Subpennies Get a Boot

By Gregory Bresiger

The frequency of subpenny trading and the level of subpenny clustering are about the same at all price levels. That's one of the conclusions of a memorandum from a study by the Securities and Exchange Commission's Office of Economic Analysis. The study also found that subpenny trades tend to cluster on the one-tenth penny and nine-tenth penny price points.

"The data show that the overall frequency of subpenny trades and the level of sub-penny clustering is approximately the same at all price levels," according to the SEC. "For example, 10.5 percent of trades priced less than $1.00 were executed in subpenny increments compared to 11.5 percent of trades priced greater than $60."

Subpenny trades accounted for 12.9 percent of trades in Nasdaq listed issues, 9.8 percent of trades in Amex issues and 1.0 percent of trades of NYSE issues in the sample week. The SEC study was conducted last year between April 21 and April 25. The study was triggered by concerns that subpenny quotes are used to gain priority over essentially same priced orders. Still, the SEC study concluded that, "this initial analysis does not show that subpenny pricing is related to stock price, however, we continue to examine this issue." The SEC, in its radical NMS proposals shepherded by Chairman William Donaldson, has proposed eliminating subpenny quoting, except in stocks trading under $1 per share. One big ECN player, INET, recently eliminated subpenny increments, excluding stocks priced under $1 and in QQQ trading.