SEC chief provokes row over decimalisation
By Vincent Boland in New York
Published: May 15 2003 0:47 | Last Updated: May 15 2003 0:47
Sharply divergent views emerged on Wednesday in response to a call by the chairman of the Securities and Exchange Commission for a review of decimalisation, which ended the practice of trading US stocks in fractions.
William Donaldson, who used to run the New York Stock Exchange, said he believed decimalisation had cut deeply into the profits of marketmakers. Wall Street brokers have long complained that the switch to trading in one-cent increments had badly damaged their businesses, exacerbated by a three-year bear market.
Mr Donaldson also said trading in one-cent increments may have cut liquidity in the stock market and raised rather than cut the cost of buying and selling stocks. "I think the whole issue really needs to be looked at," he said in an interview on CNBC television late on Tuesday.
His comments coincide with a continuing investigation by the NYSE and the SEC into possible malpractice by specialists on the exchange's trading floor. Among the charges is that they intervened excessively between buyers and sellers to make unauthorised profits.
The switch from fractions to one-cent increments raised the number of prices at which a stock can be traded from 16 - increments of 1/16 - to 100. This reduced the "spread" between the prices at which a stock is bought and sold, which had been a lucrative source of profits for brokers and specialists.
The move, in 2001, came as a bear market that has now lasted more than three years began to bite. Brokers saw trading profits tumble and thousands of Wall Street traders lost their jobs.
Meyer Frucher, chairman of the Philadelphia stock exchange, welcomed Mr Donaldson's statement. "When trading firms can't sustain their business, liquidity evaporates, and the overall quality of the markets is diminished," he said, adding that transparency had been lessened. He said the SEC and Congress should "recognise that decimalisation may be a failed experiment". The NYSE declined to comment, and the Nasdaq stock market did not return a call seeking comment.
Benn Steil, an exchanges specialist at the Council on Foreign Relations think tank, said the comments suggested Mr Donaldson was more concerned with brokers than with investors. If trading costs were still high in US stock markets, the problem was structural rather than due to pricing in cents. "The only question is whether decimalisation is in the interests of investors, and it unambiguously is," he said.
The introduction of decimalisation brought the NYSE, Nasdaq and other US stock exchanges into line with stock trading practices around the world. "You don't hear brokers in London arguing for a return to pricing shares in shillings," Mr Steil said. |
