Fear of Potential Technical Problems Prompts Nasdaq Group to Ask SEC to Delay Decimal Trading Until Next Year

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Mar 8, 2000 - 12:20 AM

Nasdaq Group Asks SEC to Delay Decimal Trading Until Next Year

By Marcy Gordon

The Associated Press

WASHINGTON (AP) - The brokers' group that operates the Nasdaq Stock Market has told federal regulators it isn't ready to meet their edict to begin trading stocks in decimals by July.

The request by the National Association of Securities Dealers for a delay until next year also threw into question the timing of a move to decimals by the New York Stock Exchange, since the two biggest exchanges would be expected to coordinate their conversions.

Frank Zarb, head of the NASD, made the request in a letter Monday to Arthur Levitt, chairman of the Securities and Exchange Commission.

In January, the SEC ordered the nation's stock exchanges to begin quoting at least some share prices in dollars and cents by July 3, requiring them to fully abandon the 200-year-old use of fractions by year's end. Under the SEC's plan, some stocks are to begin trading in 5-cent increments, with many possibly trading in penny increments by the end of the year.

"The prudent thing to do is to implement decimals when we know we are ready. We are not there yet," Zarb said in his letter, according to an NASD statement issued Tuesday. The group did not release the letter itself.

Because the all-electronic Nasdaq market has been growing faster than other stock exchanges, Zarb said, it is logically more "sensitive" to potential technical problems.

"We will not put investors and the market at risk by forging ahead too soon," Zarb told Levitt. "It is important that we do this right."

SEC spokeswoman Joanne Cronrath Bamberger said the agency had no immediate comment.

In a report released last week, congressional investigators said Nasdaq could have technical problems preparing its computer systems for the increased volume of stock quotes from decimal trading. So far this year, Nasdaq has already seen five days in which trading volume was more than 2 billion shares.

The stock exchanges have been putting together plans for phasing in decimal prices this year, now that the securities industry has cleared the Year 2000 technological hurdle.

As an interim step, the nation's two biggest exchanges - the New York Stock Exchange and Nasdaq - and some regional exchanges have been quoting stocks in minimum increments of one-sixteenth of a dollar, instead of the customary one-eighths. In decimals, a sixteenth is 6.25 cents and an eighth is 12.5 cents.

Nasdaq had said in January it would be ready to trade in 5-cent increments on July 3. The NYSE, meanwhile, has declared itself "decimal-ready."

NYSE spokesman Bob Zito reiterated that Tuesday, saying "We are absolutely ready." Nevertheless, he added, because Nasdaq now says it isn't prepared, "then we have a responsibility ... to seek both industry and government input as to what is best for investors."

The SEC has asked the NYSE, the Nasdaq and the other exchanges to submit a decimal pricing plan this month.

The Securities Industry Association said Tuesday it "fully supports" the NASD's request for a delay "in order to ensure the integrity of the markets."

Supporters say adopting the decimal system would narrow the difference between a stock's best bid and asking prices, known as the spread. Spreads typically vary from 12 1/2 cents to 50 cents, an amount that adds up to a sizable profit for brokers, who take in a percentage based on the size of the spread.

Proponents of decimalization argue that a narrower spread will increase the competitiveness and efficiency of markets, increase trading volume and improve liquidity.

By contrast, critics say the narrower spreads in decimal trading would erode profits, something that could reduce the number of market makers, the firms which form a market's backbone.

Market makers trade for their own accounts and agree to process customers' orders for particular stocks.

A sharp drop in market makers could hurt an exchange's ability to handle high-volume trading sessions.


-- Carl Jenkins (Somewherepress@aol.com), March 08, 2000

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