The pressure on brokers from lawmakers and institutional investors to convert stock prices to a decimal system is becoming almost a mandate.
Some experts predict adoption of decimalization across the board within three years, despite deep-rooted resistance from Wall Street brokerage firms.
Helping to build the pressure:
Rep. Edward J. Markey, D-Mass., late last month asked stock exchange officials to jointly study the effects of converting stock prices to a decimal system and make a report in January. Hearings will follow.
The NASDAQ stock exchange already has introduced pricing changes, reporting stock prices in intervals of as low 1.562 cents.
The New York Stock Exchange is considering allowing foreign stocks, in the forms of American depository receipts, to trade at any price.
Private trading systems, which allow stocks to trade at smaller fractions than the traditional one-eighths, are experiencing increasing popularity.
In a decimal system, stocks conceivably could be bought and sold at a difference of pennies, instead of the current increments of 12.5-cent spreads.
Carl Guidi, head equity trader at the $78 billion California Public Employees' Retirement System, Sacramento, who trades up to $1 billion worth of U.S. stocks in a day for the giant pension fund, predicts the exchanges will move to decimalization within the next three years. "It's probably more natural to think in terms of decimals anyway," he suggests. Besides, institutional investors would benefit from transmitting data in a digital format. "The data could be transmitted a lot faster ... and there won't be any rounding problems either. When we average price, we won't have to round off that much."
Not only that, but Harold S. Bradley, head of trading for Twentieth Century Investors Inc., the $26 billion Kansas City, Mo., mutual fund company, points out his shareholders could save millions of dollars each year as investors could buy and sell shares at prices pennies apart, instead of the current 12.5 cents difference.
"I am arguing for systems that will make it easier for me to reach the ultimate buyer or the ultimate seller," he noted.
Pressure from lawmakers and institutional investors, many of whom have become accustomed to trading foreign stocks overseas at any price - instead of in fractions - is pushing the stock exchanges and securities firms reluctantly in that direction.
Moreover, the many privately run computerized trading systems, some dealer-operated or run as stock exchanges of a sort, have for years permitted institutional investors to buy and sell stocks at far smaller spreads than the one-eighths of a dollar prevalent on the traditional stock exchanges.
Just last April, the NASDAQ stock market began reporting stock prices in intervals of as low as 6.25 cents, 3.125 cents or even 1.562 cents, while the American Stock Exchange in 1992 already had allowed stocks priced less than $5 to trade in increments of one-sixteenth of a dollar, or at 6.25-cent spreads. Even the Big Board, usually the last to yield to changes in securities trading, is considering allowing foreign stocks to trade, in the form of ADRs, at whatever price they fetch overseas.
These moves came even as the exchanges have been arguing decimalization would disrupt the U.S. equities markets because lower profitability (through tighter spreads and lower commissions) would make it less worthwhile for broker-dealers to assume the risk of providing capital for facilitating large trades, leading to less liquidity in the markets. What's more, the exchanges contend the cost of switching to a new system could exceed the benefits of the conversion. And lastly, some critics of the move suggest shorter spreads could lead to greater volatility in the markets.
But, just in case the stock exchanges did not get the message implicit in the Securities and Exchange Commission's comprehensive study of the equities markets published in January - that they move toward trading stocks in increments of 6.25 cents as a step toward complete decimalization - Rep. Markey asked them to conduct the joint study.
Rep. Markey is expected to hold hearings on the exchanges' report, due in January.
"I think decimalization at some time in the future will be inevitable," said Howard Kramer, associate director of the SEC's division of market regulation. "A lot of institutional investors want to trade in average prices at less than one-eighth, and the pressure will move some if not all the markets" in that direction.
Junius W. Peake, a finance professor at the University of Northern Colorado in Greeley and an expert on securities matters who has been advocating the switch to decimalization for years, estimates U.S. investors could save between $2 billion and $4 billion a year from spreads that could be lower by 2 or 3 cents per share. "Essentially it would force true competition for prices," said Mr. Peake, a former NASDAQ vice chairman. "You could improve prices by as little as 1 cent to get to the front of the line, so the inefficient execution systems would go out of business, and only the efficient would remain."
Diane Jaffee, portfolio manager at the $11.4 billion Kidder Peabody Asset Management in New York, agrees. "The move toward decimalization would create a more efficient market because you would be able to get more exact pricing ... and we feel a more efficient market would benefit our clients," said Ms. Jaffee, whose group manages more than $600 million in U.S. equities.
But, Ms. Jaffee and some other institutional investors caution such a step should be done slowly so as not to disrupt the markets.
"Everybody is trying to cut out the middleman and get to pure buyers and sellers, but you need to have an intermediary sometimes for a market structure to work efficiently," contends Andrew M. Brooke, head of equity trading at the T. Rowe Price family of mutual funds, Baltimore.
"We don't base our trading on spreads, we base our trading on investment decisions," Mr. Brooke added.