January 26, 2001
NYSE, Amex Ring in a New Era,
Going Fully Decimal on Monday
By GASTON F. CERON
Dow Jones Newswires
NEW YORK -- A 208-year-old tradition is about to bite the dust.
For traders at the New York Stock Exchange, Friday's 4 p.m. closing bell marked something more meaningful than just the end of another trading day. It also signaled the end of the fractionalized stock prices, such as 10 1/8, that have been the norm ever since the exchange's birth in 1792.
Beginning Monday, prices for the Big Board's 3,525 listed securities will be displayed in decimals, such as $10.13, as the NYSE completes a gradual shift that began with just seven of its stocks last August. The American Stock Exchange has also been moving its stocks to decimals and will complete that process on Monday as well.
It's a big change for tradition-laden Wall Street -- traders' profits may be squeezed and computer systems could be strained. "It's going to take a little bit of time for everyone to get used to it," says Peter Mancuso, a senior partner at Buttonwood Specialists LLC, a trading firm that operates on the NYSE's floor. But in the end, he doesn't think many tears will be shed over the demise of fractions. Mr. Mancuso is one of the Big Board traders that already uses decimals, as part of the exchange's decimals pilot program, and says he's had a smooth transition.
Having two major stock exchanges trade all their stocks in decimals will represent an important milestone toward Wall Street's goal of completing "decimalization" by April 9, the deadline set by the Securities and Exchange Commission. It's also yet another instance of Wall Street making its practices a bit more investor-friendly: After much foot-dragging, it will let investors buy stocks in the same way they purchase groceries -- in dollars and cents.
But although securities industry officials say they are confident that the switch to decimals will be a smooth one, there are many unanswered questions. For example, many wonder what savings, if any, investors will reap from being able to trade stocks in decimals. Conversely, traders are anxious to find out if their profits will suffer. And Wall Street's technology experts, who've had years to prepare for the shift, will soon find out if their computer systems are robust enough to handle the increased trading activity that decimalization is expected to draw.
Decimalization will allow stock prices to fluctuate in increments as small as a penny, a large drop from the increment of one-sixteenth of a dollar, or 6.25 cents, that has been common for many stocks. Regulators have argued that trading in pennies will reduce the "spread" -- the difference between the price bid for a stock and the price asked for it -- and thus will lead to investor savings. So far, the early evidence indicates that spreads are indeed shrinking, by an average of 20% for the NYSE stocks that used to trade in fractions and have already been decimalized, says Robert Britz, a NYSE group executive vice president.
For stock dealers, that should be cause for worry, as pocketing the spread is a natural way to profit from trading. But a more narrow spread doesn't mean that their earnings are about to collapse. For starters, dealers have argued that not every stock will naturally trade at a penny-sized spread just because it can. And more importantly, dealers hope that narrower spreads will encourage more trading and lead to higher volumes, which could compensate for the lost spread profits.
For investors, the picture is also unclear. The savings from reduced spreads may materialize -- or they may not. Another potential problem is that by being able to trade in pennies, professional traders will now have an easier time stepping in front of investors' orders. So far, the NYSE hasn't seen evidence of this problem, says Mr. Britz, but the exchange is "aware" of the possibility that it may arise.
There are other issues. Mr. Mancuso, the Big Board specialist, says he has noticed an increase in orders to buy or sell stock at the best price available, or "at the market," in the decimalized stocks that he handles. If trading in decimals does indeed encourage market orders, it may end up doing so at the detriment of "limit" orders, which are orders to buy or sell stock at no worse than a set price and are often recommended to small investors as protection against market swings.
Meanwhile, Wall Street's computer experts are bracing themselves for the surge in trading activity that may ensue following decimalization. Mr. Britz, the NYSE executive, says the exchange has observed an increase of 38% in stock-quote traffic for the securities that already trade in decimals. The NYSE says its systems are well-equipped to handle increased trading volumes once decimalization goes full-blast. Jeff Wells, a senior vice president at Bridge Information Systems, a market-data provider, says it's "highly unlikely" that decimalization will lead to big technology problems, but adds that he'll be monitoring the shift "very closely."
Even after the NYSE and Amex move their stocks to decimals, Wall Street will still have to wait until March, when the Nasdaq Stock Market will begin its decimalization program. While the NYSE and Amex took five months to change to decimals, Nasdaq will attempt to complete the shift in a three-step process that will take a little less than a month. Nasdaq says it will be ready by April 9, although the fast pace of the conversion is making some people nervous. "I think it would be much more sensible to extend the break-in period," says Lee Korins, the president of the Security Traders Association.
Meanwhile, speculation is about to become reality at the Big Board, as the exchange gets ready to adopt a new dialect that will no longer include references to "teenies," the nickname by which traders refer to sixteenths of a dollar. Some traders may grow nostalgic at the thought of abandoning fractions, but making money is the Street's most honored tradition, and you can bet they'll adapt. After a while, says Mr. Mancuso, "you'll forget all about eighths and sixteenths."
Write to Gaston F. Ceron at gaston.ceron@dowjones.com |
