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Financial industry readies for decimal conversion

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After years of foot-dragging and recent delays, markets look ahead to early 2001 changeover

With so much brainpower on Wall Street, changing the pricing of stocks from fractions to the more customer-friendly decimals should be, well, a no-brainer.

But the U.S. securities industry has been jawboning about reporting stock prices in dollars and cents rather than fractions for about four years now, and yet nothing has changed.

In the latest development, the U.S. Securities & Exchange Commission said last week that the major stock markets now have until April 9 to price stocks in dollars and cents instead of fractions.

The new pricing system was supposed to kick off this summer but was delayed. And after years of foot-dragging by the securities industry, investors probably should view the new deadline with a skeptical eye. However, industry officials say it's really going to happen this time, and most market experts agree.

"We are very confident about converting this time," said Nasdaq spokesman Scott Peterson. The New York Stock Exchange says it's ready, too.

Earlier this year, the SEC asked the major exchanges and the National Association of Securities Dealers, which operates the all-electronic Nasdaq, to begin using decimals by July 3. In other words, a stock at the current price of 71/8 would be listed as $7.13.

The NYSE said it could meet the deadline, but the Nasdaq said its computer system was so overwhelmed with record trading volume it couldn't meet the deadline. The SEC said it was "dismayed and disappointed" that Nasdaq officials couldn't meet the deadline, but granted them more time and asked the NYSE to wait until the NASD was ready.

With virtually every stock market in the world pricing in decimals, continuing to trade in fractions has begun to look rather antiquated, industry experts say. And hundreds of newspapers and Web sites already display stock prices in decimals.

Mr. Peterson said Nasdaq trading volume "exploded" in late 1999 and early 2000 – hitting a record 2.89 billion shares on April 4 and consistently averaging more than 1.3 billion shares daily. That's twice the volume of a year ago, he said.

The daily volume at the NYSE has increased too, but at a much slower pace. It now averages about 1 billion shares a day.

"If our volumes would have remained relatively static, then it wouldn't have been so much of a problem to add on decimalization," Mr. Peterson said.

The Nasdaq has already spent about $100 million on converting to decimals – mostly for additional computing power – and probably will spend another $30 million before it's ready, he said. The NYSE has spent $30 million, but that's a rough estimate because the exchange is constantly updating its technology, and it's hard to determine the amount spent directly on decimalization, said spokesman Ray Pellechia.

The NYSE will actually begin a pilot program in decimal pricing of 50 stocks in September, then expand it to all 3,100 NYSE-listed stocks by the April deadline. These stocks will be quoted down to the penny, but the SEC has given the markets the option of trading in increments of up to a nickel.

Mr. Peterson said Nasdaq would be ready to quote in penny increments or a nickel, "whatever the SEC likes. We are agnostic on that point."

The conventional belief is that penny increments will result in smaller spreads – the difference between the price a buyer is willing to pay for a stock and the price a seller is willing to accept. The difference goes in the broker's pocket as profit.

Currently, spreads vary from 6 cents to 12.5 cents. Lawmakers have estimated that the smaller spreads will save small investors about $3 million a day in trading costs.

And that's why most industry experts believe conversion to decimals will finally happen: It helps average investors.

"The SEC wants to move forward on this because of the benefits to small investors," said SEC spokeswoman JoAnne Bamberger.

Michael Goldstein, professor of finance at Babson College in Massachusetts and an expert on stock spreads, said he expects the major exchanges to convert to decimals by early next year, but he's concerned about the spreads getting too small.

"Narrow the spreads and save investors millions – that's a nice sound bite, but we better be careful," he said.

He found that liquidity – the ease with which buyers or sellers can be found in the marketplace – was reduced in 1997 when the NYSE trimmed spreads from 1/8 to 1/16. That's because the number of limit orders declined.

A limit order refers to an investor setting a specific price at which he is willing to buy or sell a stock, as opposed to a market order, which is executed at whatever the market price is at the time the trade is complete. With smaller spreads, its easier for a limit order placed late in the day to take precedence over an earlier order that offers to pay a penny or two less for the stock, Mr. Goldstein said. Frustrated investors might react by not trading at all, he said.

He also believes the small spreads will increase price movement.

"With so many price points, the prices will jump around all over the place," Mr. Goldstein said. "This won't help investors near as much as they think, but it's coming."
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