Nasdaq seeks to end 'subpenny' trades
By Gaston F. Ceron, Associated Press
NEW YORK -- For Nasdaq Stock Market Inc., splitting the penny has turned into a splitting headache.
Tired of competing against venues that allow trading stock in increments smaller than one cent, the Nasdaq is asking regulators to either stop the practice or let Nasdaq take part in it. Meanwhile, trading-system operator Instinet Group Inc. is running a pilot program that, if broadened, could limit this so-called "subpenny" trading.
In subpenny trading, which is available on some trade-matching services, the price for a stock can be displayed beyond just two places after the decimal point: $10.161 instead of $10.16, for example. It's not a new phenomenon, but Nasdaq officials say its use is on the rise, and some trading executives see it as harmful. Nasdaq executives point out that subpenny trading isn't generally available to small investors and that it can easily lead to professional traders stepping in front of investors' orders.
Nasdaq stock dealers have typically not been fond of small increments in stock trading.
since they can thin trading profits.
"We would prefer that they not be legal," said Larry Leibowitz, an executive vice president at Charles Schwab Corp., of subpennies.
Subpenny trading followed, in part, from the 2001 switch away from fractionalized stock prices, such as 10 and one-quarter, in favor of "decimalized" prices such as $10.25. A byproduct of decimalization was that the smallest increment in which stock prices move was narrowed to a penny at Nasdaq and at the New York Stock Exchange. But some trading systems, seeking an edge, continued to allow their customers to trade in increments smaller than one cent.
That's a problem for Nasdaq, whose stock-trading system doesn't use subpennies. To solve it, the market is playing "a game of chicken with the SEC," said Steve Swanson, chief executive of Automated Trading Desk, a stock-trading company in Mt. Pleasant, S.C. Trying to bring the issue to a head, Nasdaq in August asked the SEC to allow it to use subpennies.
The request was made "in order to remain competitive," said Edward Knight, Nasdaq's General Counsel. But what Nasdaq officials really hope is that their petition forces the SEC to ban subpenny trading outright.
Subpenny trading is favored by certain sophisticated traders, said Sanford C. Bernstein trading chief Matthew Andresen. But it's unclear that the practice has widespread advantages.
"Like everything else, you do reach a point of diminishing returns," said Andresen.
Several market participants object to what they see as a dangerous side effect. "Some participants use subpenny increments to 'step ahead' of displayed quotes and limit orders for an economically meaningless amount," thereby hurting the market, said Knight.
Knight suggested such behavior runs counter to the SEC, which he said has often stated "that one trader must make an economically meaningful contribution to the price of a security in order to gain priority over another trader."
There are others who question trading in such narrow increments. There is little that small investors can do, Knight said, because they often can't see or use subpenny quotes. |
