Decimalization of prices on the New York Stock Exchange and other major U.S. equity trading markets might come one day, and if it does soon, shareholders will owe some thanks to Steven M.H. Wallman.
He is the only commissioner of the Securities and Exchange Commission to have come out in favor of trading stocks in cents, instead of the one-eighth increments now typical on the NYSE. Mr. Wallman has been a strong advocate of the change for several years.
The other SEC commissioners, while they haven't come out against the idea, haven't come out in favor of it either. Endorsement by them, particularly Arthur Levitt Jr., SEC chairman, would give much more force to the proposal, now in Congress.
A bill on decimalization last month was voted out of a House subcommittee on finance. The next step takes the measure to the Commerce Committee. Mr. Wallman was the only SEC commissioner to testify on the issue.
His term is expiring this month. Mr. Wallman hasn't made any public comments on his plans. But it seems there's at least an ambivalence about his leaving the SEC.
Shareholders should be disappointed at the lack of reaction at the SEC. The SEC is supposed to be the champion for shareholders, particularly small shareholders. It should lead in taking a position on decimalization. At least it should be elucidating the issues. Certainly shareholders need to be informed, such as:
Why has this historical oddity of trading in one-eighth increments survived? Should it be scrapped in favor of decimals? If trading in decimals begins, should it be in increments of pennies or nickels?
Some proponents of decimalization contend the issue is a matter of profit, giving brokers at least an automatic 12.5-cent spread in prices. On the other side, others suggest trading in cents would diminish market liquidity and depth, thus resulting in shareholders paying more than now. In regard to depth, some say only a few shares, perhaps, 100 or 1,000, depending on the situation, may be available at a desired price; to trade more, the price will be raised. So the benefits could be illusionary.
Peter Jenkins, managing director of Scudder Stevens & Clark testified, saying, "Decimalization along with other structural changes can add to greater efficiencies to the trading environment. I think the evidence is clear. Institutions want to trade at fractions lower than currently allowed by the exchanges. There is a desire to discover price, yet the market is not structured properly to get the job done."
Harold S. Bradley, vice president and director-equity trading, American Century Investment Management, testified before the subcommittee in support of decimalization. Noting every world market except the U.S. trades in decimals, he said the move could save investors with American Century, which has $75 billion under management, $300 million. in transaction-related costs. "It is a great and unfortunate irony that the NYSE, the most visible symbol of free enterprise, competition and the fruits of capitalism, relies on fixed spreads."
Potentially billions of dollars annually are at stake, if one considers that fractional trading pricing adds even just one cent to the cost of every trade. For that reason the SEC needs to take a leading position on the issue. Mr. Wallman is doing his part. What about other commissioners?
