Consultants give mixed views on whether institutional investments will benefit from moves to decimalize trading prices on the New York Stock Exchange.
Despite an interim step taken by the exchange to move to trade in sixteenths instead of increments of an eighth, including legislation on the issue in Congress, Laszlo Birinyi Jr., president, Birinyi Associates Inc., Greenwich, Conn., was not optimistic about decimalization's advantage.
"Institutional investors should realize they're not getting what they think" in decimalization, Mr. Birinyi said.
"In the end, investors will find out they are no better off."
"I think it's another case of people aiming at the wrong target," said Mr. Birinyi, who consults on trading issues. "It really doesn't address the issue that should be addressed. The focus should be on trading costs, to get more saving on trading costs. This (decimalization) will not achieve that."
Gilbert L. Beebower, executive vice president, SEI Corp., New York, who also consults on trading, favors the move to decimalization.
"I believe it's the right direction to go," Mr. Beebower said. "It permits narrower spreads or negotiating narrower spreads."
"Was there anything sacrosanct or God-given about trading in an eighth?" Mr. Beebower added.
But Wayne H. Wagner, president, Plexus Group, Santa Monica, Calif., which also analyzes trading, said the indications are "when the spread narrows, the liquidity goes down." So institutional investors could pay a price for trading in decimals.
Pending approval by the Securities and Exchange Commission, the New York exchange plans to begin trading in increments of sixteenths by the end of the month as an interim step to decimalize prices.
"The exchange believes the industry should be prepared to convert to decimals by January 2000," according to a statement from the NYSE. "The NYSE will create a committee of senior operations executives to assist in the preparation and implementation of industry efforts to change to decimals."
Steve D. Hayward, portfolio manager, of the Marshall Mid-Cap Stock Fund, and co-manager of the Marshall Small-Cap Stock Fund, sponsored by M&I Trust & Investment Management Corp., Milwaukee, said recently he opposed decimalization, saying it will make markets less deep and more costly to trade than under the current one-eighth increments.
Mr. Birinyi also expressed concern about market depth, or the ability to trade an entire order at a desired price.
"Institutional investors think they will save money on trades (by decimalization) when they will see an actual increase in trading costs.
"Nobody gives anybody anything.
"This (decimalization) is done by people who aren't in the market - legislators and academics - who try to solve a lot of problems on paper," Mr. Birinyi added.
"Securities brokers are like water balloons. You can push in one side and it will come out the other. They won't make money on some trades" because decimalization will lower the spread. "But they will make money on other trades" as they seek to recoup their revenue.
He noted roughly 85% or 90% of trades on listed markets now take place at the last-sale price and a large number of the rest of the trades take place plus or minus an eighth from that price.
"A lot of academics and politicians believe if we reduce the eighth increment to a nickel, this will benefit investors," Mr. Birinyi added. "But I contend under this new utopia, you will have a smaller percentage of trades taking place at the last sale price." Instead, "you'll have 40% at the last-sale price and 60% at plus or minus 5 cents.
"I think it will really turn out to be a non-event," Mr. Birinyi said of decimalization.
Mr. Birinyi emphasized institutional investors need to understand and analyze trading costs and get "a better handle on trade implementation." He characterized the focus on decimalization as misguided as the focus on brokerage commissions. In seeking to lower commissions by a penny or two, Mr. Birinyi said, institutional investors "end up costing themselves 12.5 cents in terms of market execution. Major brokerage firms don't bend over backwards for clients who put a gun to their head."
Mr. Beebower supports decimalization.
"Bottom line, the smaller increment you can negotiate in trading, the more helpful it should be" in lowering trading costs.
In terms of market depth, Mr. Beebower concedes "market makers need to feel comfortable they can make money" in trading in decimal increments.
With decimals, he said, investors can negotiate with market makers an acceptable rate and get at least a penny better, instead of the current haggling over increments of 12.5 cents.
SEC Commissioner Steven M.H. Wallman, who has advocated the change, called the NYSE's announcement of its effort to trade in decimals in 2000 a "tremendous improvement for investors and for all our markets."