Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, August 16, 1995 TAG: 9508160085
SECTION: BUSINESS PAGE: B7 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
A switch to decimal trading, a new academic study says, will cut costs for investors and reduce a practice known as payment-for-order flow, which critics call the equivalent of kickbacks paid for stock orders.
Scrapping the old ways of quoting stocks is gaining new attention as the Toronto Stock Exchange announced plans last month to convert to decimal pricing.
The idea of switching to decimal pricing has a powerful friend in Washington - Securities and Exchange Commission member Steven M.H. Wallman.
``Personally, I think the time will come for a new system that's based on decimals,'' Wallman said in an interview Tuesday. ``I think we have to move towards that at a reasonable pace.''
The SEC staff, in a 1994 study called ``Market 2000,'' went on record favoring changes in the current system of quoting stock prices in increments of 121/2 cents or one-eighth of a dollar. Quoting stocks in such a fashion ``can cause artificially wide spreads and hinder quote competition,'' the SEC report said.
A spread is the difference between a stock's best bid and asking prices - or buy and selling prices. Spreads typically vary from 121/2 cents to 50 cents, an amount that adds up to a sizable profit for brokers when large blocks of securities are traded.
The origin of the 121/2-cent increment, a pillar of the stock market system, is unclear. The SEC's 1994 study said the reasons why the founders of U.S. stock trading settled on this arithmetic are ``lost in the history of the securities market.''
Junius W. Peake, a finance professor at University of Northern Colorado at Greeley, Colo. and self-described ``long and noisy proponent'' of quoting stocks in decimals, argues that investors would emerge as winners if the spread was knocked down from the current 121/2-cent minimum.
That's because the price investors pay for securities trades would more accurately reflect costs incurred by brokerages.
Rowland W. Fleming, president and chief executive officer of the Toronto Stock Exchange, focused on the investor benefits when the exchange publicized its intent to switch to decimal trading.
``By decreasing the one-eighth increment, there will be more efficient pricing, enhanced competitiveness, increased trading volume and greater visibility and liquidity,'' Fleming said. ``This will benefit all investors in our market.''
The Toronto Stock Exchange is developing its decimal trading plan and will announce the specifics sometime this fall, said exchange spokesman Jim Gallagher.
Wallman, who applauds Toronto's move, is informally studying the surprisingly complex issues surrounding decimal pricing.
Opponents argue a change to decimals could hurt a market's liquidity - the ease with which simple securities trades can occur without abrupt changes in price - a central feature of smooth-running markets.
The opposition also fears decimal trading would erode profits and thus lead to a decline in the number of market makers, the firms which form a market's backbone by trading for their own accounts and processing customers' orders. A sharp drop in market makers could hurt an exchange's ability to handle high-volume trading sessions.
``I don't think the analysis is simple,'' Wallman said.
Neither of the nation's two dominant stock markets - the New York Stock Exchange and the Nasdaq Stock Market - plan to switch to decimal pricing any time soon, spokesmen said.
by CNB