Investors Get Better Deal with Decimals
By Mark Weinraub
NEW YORK (Reuters) - Pennies and nickels added up for investors as they got much better prices for blue chip shares on the first day of decimal trading -- exactly what regulators had hoped.
Spreads, the difference between what a buyer and seller are asking for a stock, on Monday on the average dropped a whopping 46.4 percent for the 28 stocks of the Dow Jones Industrial Average .DJI) listed in decimals, according to market research firm Instinet Research.
Narrower spreads help investors because they now can adjust their orders in increments of a penny instead of one-sixteenth, or 6.25 cents, regulators and exchange leaders have said. Share dealers, by contrast, have cautioned those benefits could be offset by factors such as higher brokerage fees stemming from conversion costs.
Government regulators pushed for the shift to pennies and nickels -- ending a centuries-old practice of listing stocks in fractions -- in the hope of reducing the spreads. Both the New York Stock Exchange (NYSE) and the American Stock Exchange completed the conversion on Monday, which brings them in line with markets around the globe.
The spreads on all 28 NYSE stocks that are part of the Dow, the oldest U.S. stock barometer, which is designed to reflect the performance of the overall market, narrowed on day one of decimal trading.
Narrower spreads don't automatically equal better prices for investors because supply and demand may be less, said Robert Basel, managing director of equity trading at Salomon Smith Barney.
``Just because the spreads are tighter does not mean that there's more liquidity,'' Basel said. ``Did it tighten up the market? I do not necessarily think so. But let's play it out for a couple of weeks. Let's make it a definitive judgement.''
Local telephone company SBC Communications Inc.'s (NYSE:SBC - news) spread dropped the most on Monday, falling nearly 72 percent to 4 cents a share from an average of 14 cents in the week leading up to decimalization. Spreads of telephone and cable television giant AT&T Corp. (NYSE:T - news) narrowed the least but still fell about 28 percent, to 6 cents from 8 cents.
Traders expected a jump in trading volume to go along with decimals, but volume actually fell 12.9 percent on the decimalized Dow stocks, said Instinet Research, which is a unit of Reuters Group Plc's (NasdaqNM:RTRSY - news) agency brokerage firm Instinet Corp.
Overall, about 1 billion shares changed hands on Monday on the NYSE, about equal to its average daily trading volume.
Despite the narrowing spreads, traders have warned that investors' costs could rise because of the increased manpower it takes to complete trades in a decimal environment, where prices jump around more frequently. The higher volatility comes from the number of pricing points available between dollars, which jumped to 100 from 16 when the switch was made.
The increased time it takes to complete larger orders in a decimal environment may also harm investors, traders said. While working with stocks that traded in decimals during testing phases, traders said it is difficult to find a stable price with the greater volatility in decimal stocks, requiring them to break orders down to smaller sizes.
But on the first day of decimal trading, price quotes actually changed less frequently, with the level dropping 1.1 percent from the prior week. As forecast, trade sizes on the Dow stocks were smaller, declining an average of 12.2 percent.
Dow components Microsoft Corp. (NasdaqNM:MSFT - news) and Intel Corp. (NasdaqNM:INTC - news), which are listed on the Nasdaq stock market, are the only two of the Dow 30 still traded in fractions. Both companies' spreads stayed stable on Monday when compared with the prior week's trading, averaging the equivalent of 7 cents per share, the Instinet Research study said.
Nasdaq, which is testing its systems for decimalization, has said that it will be decimal-ready by the U.S. Securities Exchange Commission's deadline of April 9. |
