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August 23, 2005

GAO Decimals Study Promotes Benefits

By Gregory Bresiger

(Traders Magazine, August 2005) -- A U.S. government report found that 1-cent ticks are working for investors.

Decimal pricing, adopted in stock markets in early 2001, has reduced average trading costs by between 30 percent and 53 percent, the General Accounting Office (GAO) reports in a survey of almost two dozen firms.

"Further, 87 percent of the 23 institutional investor firms we contacted reported that their trading costs had either declined or remained the same since decimal pricing began," according to the report. These institutional firms held 31 percent of the assets managed by the top 300 U.S. money management firms.

Wayne Wagner, chairman of the Plexus Group, told Traders Magazine that he wasn't surprised by the findings because, "decimals have been good for the market." Wagner said that decimals are needed because "one can't always depend on broker-dealers to find liquidity when there are no buyers and many sellers." Still, the move to decimals also has, in part, contributed to some "challenging operating conditions since 2001," the report stated.

"From 2000 to 2004, the revenues of broker-dealers acting as New York Stock Exchange specialists declined over 50 percent, revenues for firms making markets on Nasdaq fell over 70 percent, and the number of firms conducting such activities shrank from 500 to about 260."

The 1-cent tick, the report stated, has also caused a reduction in transparency.

"Fewer shares are now generally displayed as available for purchase or sale in U.S. markets," the GAO said. "However, large investors have adopted by breaking up large orders into smaller lots and increasing the use of electronic trading technologies and alternative trading venues."

Wagner also noted that the decline in trading costs also was caused by the bear market that led to flight from many technology issues. "Those are the most expensive to trade," Wagner said. The more traditional large-cap stocks are easier to trade and generally have lower costs, Wagner added.