SEC Orders Decimalization of Securities
siliconinvestor.com
By Jeremy Pelofsky Jan 28 6:44pm ET
WASHINGTON (Reuters) - The Securities and Exchange Commission on Friday ordered U.S. securities markets to begin quoting stock and option prices in decimals by July 3 and complete in the process by year-end, in a move to boost competition and make it easier to compare prices.
The order requires that the SEC receive implementation plans within 45 days from the New York Stock Exchange, the Nasdaq's parent company, the National Association of Securities Dealers Inc., and other U.S. securities markets.
``Decimal trading will benefit investors by allowing greater competition and making it easier to compare prices,' SEC Chairman Arthur Levitt said. ``It will also bring about consistency with foreign markets.'
The SEC order said trading decimals will also enhance investor comprehension and facilitate globalization of markets and possibly reduce transaction costs.
The United States is the only country where major financial markets use fractions like 1/2, 1/4 and 1/16 rather than in decimals to price securities, and while the shift to decimals was not unexpected, the SEC order heightens the pressure to implement a system quickly.
The markets had already been granted permission from the Justice Department to discuss and share information regarding decimalization without any antitrust concerns weighing overhead.
The NYSE ``is decimal-ready, and we will continue to work with the SEC and the industry toward a smooth conversion to decimal pricing,' a Big Board spokesperson said.
Still, in a recent poll, 34.4 percent of 427 traders surveyed said decimalization would have the biggest impact on the markets this year, and one industry group leader predicted it will not go smoothly because the market infrastructure may not be able to handle increased volume that could arise from decimal trading.
``The conversion of prices from fractions to decimals will not go as smoothly as many people think,' Lee Korins, president and chief executive of the Security Traders Association, said earlier this week when the poll was released.
During the phase-in period of decimals, the markets will be allowed to quote equity prices in increments of up to 5 cents, the SEC said.
``We're confident that they will be able to get the plan done on time, and we're going to make sure that we're part of the process to make sure that the implementation begins on time and is finalized on time,' SEC spokesman Chris Ullman said.
At the same time, they must also develop and run a pilot program in which a sample of securities will be quoted in one-cent increments, the SEC said.
After that 6-month phase-in period, the markets will have to submit a study that examines the impact of pricing in decimals on trading and capacity and whether a uniform pricing increment is needed and if so, what it should be.
``I think it will help take a little bit of the mystery out of the pricing,' said Stuart Kaswell, general counsel at the Securities Industry Association.
``The whole reason for doing this in phases and step by step is to avoid any difficulties,' he said. ``If we do encounter ones, they will be small and they will not system-wide and we can address them before we go full tilt.'
The order covers the following exchanges: American Stock Exchange LLC, Boston Stock Exchange Inc., Chicago Board Options Exchange Inc., Cincinnati Stock Exchange Inc., National Association of Securities Dealers Inc., New York Stock Exchange Inc., Pacific Exchange and Philadelphia Stock Exchange. |
