The Wall St. mob is back at it>
(Maybe NITE, SIEB & old 20 cent dog MHMY would be ways to play this)
Wall Street sees small-tick time bomb
Published May 22, 2003
Wall Street has come up with a curious solution to the current public skepticism toward buying stocks: Raise the price investors must pay to trade.
William Donaldson, chairman of the Securities and Exchange Commission, called last week for a review of the 2-year-old reform that reduced the trading costs for many ordinary investors.
At the annual meeting of the Executives' Club of Chicago Wednesday, Richard Grasso, chief executive officer of the New York Stock Exchange, took up the theme.
He said it's time to rein in the full effects of quoting stocks in dollars and cents. Previously, stock prices were quoted according to an old system of fractions based on one-eighth of a dollar. Now, the minimum increment for trading, called the tick, is a penny.
So-called decimal pricing has cut the dealer spread between the price to buy (the bid price) and the price to sell (the ask price) to a penny for many stocks. In other words, the dealer would buy a share at $10 and sell it to you at $10.01.
Before the change, bid-ask spreads on most widely traded stocks were in 16ths of a dollar (6.25 cents). That means the share you bought for $10.0625 cost the dealer $10. Over time, wider spreads cut noticeably into investor profits.
"I believe the move to decimals . . . should have stopped at a nickel," Grasso said. "I'm not a Luddite, but I think that it's important that we step back and say, `Did we overdo it?'"
In an interview, Daniel Weaver, professor of finance at Baruch College in New York and a widely quoted advocate of decimal pricing, agreed.
"We should increase the tick to a nickel," Weaver said.
Bid-ask spreads of a penny have reduced revenues for dealers in stocks and made them less willing to assemble large blocks of stock sought by mutual funds and other institutional investors, he said.
When a bid to buy or an offer to sell a block of stock can be outdone for a penny a share, "people who supply liquidity to the market are reluctant to do so," Weaver said. As a result, "the market is more volatile."
A higher minimum tick would force small investors to pay more when they trade individual stocks.
chicagotribune.com |
