>From the Wall Street Journal this morning... Nat ---------------------------------------------------------------------------- January 29, 2001 Heard on the Street NYSE, Amex Price All Issues in Decimals By JEFF D. OPDYKE Staff Reporter of THE WALL STREET JOURNAL Starting Monday, fractions will be out of action on the New York Stock Exchange. After more than two centuries of trading stocks in fractions, the NYSE Monday morning will begin pricing all of its 3,525 stock issues in decimals. The much-smaller American Stock Exchange is making the switch Monday morning as well. The pricing revolution has been several years in the making. But for investors who pay more attention to the companies they buy than where those shares trade, the next few months could be a mind-numbing challenge. That's because while NYSE- and Amex-listed stocks are now fully decimalized, the Nasdaq Stock Market -- home to some of the most heavily traded names on Wall Street, including Intel and Microsoft -- won't fully convert its nearly 5,200 issues until early April. Thus, investors will be trading some of their holdings in pennies while others still will require them to think in fractions. (The Wall Street Journal's daily price tables for all U.S. stocks were already converted to a decimal format last year, in anticipation of the markets' conversions. Thus, Monday's Nasdaq tables are in decimal format even though the market hasn't converted yet.) Nasdaq is taking longer because amid a surge in volume last year, it decided to focus more on handling increasing investor demand for trading and price quotations than on working to decimalize its stocks. That's not to imply the Nasdaq is completely behind the curve. On any given day, the Nasdaq handles about 10% of the trading volume in Big Board shares, "so we've been gaining experience as [the NYSE] has," says Scott Peterson, a Nasdaq spokesman. Proponents of decimalization contend that the conversion to a quote system that is more akin to counting pocket change than deciphering middle-school math will be a boon to investors. Not only does the shift do away with often knotty fractions -- quick, what's 13/256? -- but it is also expected to narrow the spread between a stock's bid and asked price. The bid is the highest price a buyer is willing to pay; the ask is the lowest price a seller is willing to accept. Stocks now will trade in increments as small as a penny. Prior to the change, stocks on the NYSE typically traded in increments of 1/16 at a time, or 6.25 cents. The argument in support of decimalization is that because investors now have 100 price points instead of 16 between each dollar, they can "save themselves potentially significant amounts of money," says Robert Britz, an executive vice president with the NYSE. For instance, drug company Merck spent part of Friday bid at 83 3/16, asked at 83 1/4, a spread of 6.25 cents. This morning, investors will instead be able to meet somewhere in the middle, say, at $83.20. At that price, a buyer would save money by not having to spend $83.25 to meet the fractional asked price for Merck, and the seller would save money by not having to step down to 83.1875 to hit the bid price. The NYSE began testing decimalization in August in a pilot program that started with seven stocks but ultimately included 159 issues. There are some potential trouble spots to trading in decimals, though. One of the chief fears that some investors have expressed concern "front running," an unsavory practice in which traders step in front of their customers' orders by offering a slightly better price. Traders do this hoping to pocket tiny profits here and there. Under the fractional system, traders seeking to front run would have to offer a price 1/16 better than their customers', exposing themselves to a 6.25-cent-a-share risk if their gambit were to fail. Now, they will be able to do it by just adding a penny or two, greatly reducing their financial risk. The NYSE, says Mr. Britz, was aware of this potential predicament early on, and has had what he labels a "well-armed" market-surveillance program in place. To date, he says, the exchange has seen nothing untoward occurring. What has become apparent, though, is a lack of visible "liquidity," or the amount of shares readily available for trading. Consider trading on Friday in Compaq Computer, one of the NYSE-listed stocks already traded in decimal fashion as part of the exchange's pilot program before today's full conversion. At one point on Friday, for instance, Mr. Joyce notes that Compaq was quoted at $22.34 bid and $22.36 asked. The visible number of shares looking for a trade was 1,000 on the bid side and 1,300 on the asked side. By comparison, Merck, still traded in fractions on Friday, had at one point 10,000 shares bid and 20,000 offered. "There's no real volume being shown" in some of the decimalized stocks, because investors can spread their trades across a vastly larger number of price points, says Thomas Joyce, managing director of equity e-commerce at Merrill Lynch. Investors, thus, "are having to work a lot harder to find the liquidity that's out there." The NYSE is working on a project now that later this year will open the specialists' limit-order book. That will show greater depth in the number of shares on the bid and ask sides of the ledger. Meantime, brokerage firms are working harder. Because of the increased number of prices at which a stock can trade, large orders are being executed in many more partial transactions. In the past, a 10,000-share block of Compaq might be bought or sold in four transactions: two 2,000-share blocks at 22 5/16, a 3,000-share trade at 22 1/4 and another 3,000-share trade at 22 3/8. Now, says Peter Henderson, a specialist handling Compaq trades on the floor of the NYSE for LaBranche & Co., that same block trade "may now go off in 10 or 12 executions and at seven or eight different prices." That creates more back-office work. John Panchery, vice president and decimals-project manager for the Securities Industry Association trade group, which has helped manage the conversion, says that while that may be a nuisance early on, "so much of the floor is automated that the problem will just dissolve away." The NYSE's conversion to decimals has its roots in 1995, when the Big Board began looking for ways to become more competitive in trading U.S.-listed foreign shares. Much of the rest of the world trades its stocks in decimals, yet when a foreign issuer like Deutsche Bank or British Telecom listed its shares in New York, they had to be quoted in fractions. The result, says the NYSE's Mr. Britz, was that the New York exchange, which dates to 1792, "was having difficulty competing" against a company's home market on price. That planted the notion of decimalization. Two years later, Congress and the Securities and Exchange Commission picked up on the idea as a way to make the U.S. securities market easier to trade in, and to help investors save money. The process has taken so long to implement, Mr. Britz says, because the industry needed to ensure that all the systems were in place among the exchanges, the brokers and the clearing firms to ensure glitch-free transactions and quotes. "It's been like learning to speak a different language after 200 years," says Mr. Panchery, at the industry association. By the way, 13/256 is roughly equal to a nickel. Write to Jeff D. Opdyke at [EMAIL PROTECTED]
