Some fine-tuning related to decimal stocks....
Nat
NY Times Business Section
February 17, 2001
Big Board Will Study Effects of Decimal Trading
By FLOYD NORRIS
he New York Stock Exchange, scrambling to deal with some institutional
investors who are angry about the way markets are operating now that stocks
are traded in cents rather than in fractions of dollars, said yesterday that
it would set up a group to study changes in the system.
It is unclear, however, just what changes may be proposed. The most widely
discussed idea, of allowing prices to change only in 5-cent increments,
rather than a penny, has substantial opposition and in any case would need
government action to impose it.
Richard Grasso, the president of the stock exchange, told a news conference
that some traders "are frustrated" with the new decimal system, and that
some of those traders "are very emotional" about it. But he added that other
traders see the change "as a nonevent." He said he hoped that some changes
would be proposed by April.
With decimals, stock prices can move a penny at a time, in contrast to the
old rules that limited to one-sixteenth of a dollar � 6.25 cents � the moves
in the prices that traders were offering to buy or to sell. That has led to
more frequent changes of quotes, and to markets that offer less liquidity at
any given price.
As a result, it can be easier for an individual investor, who may want to
buy only 100 or 200 shares, to get a good price for a trade, while an
institutional trader who wants to buy 10,000 shares ends up paying a higher
price.
Some traders are clearly having trouble adjusting to the new environment. "I
had a trader who complained that she tried to sell stock at $35.04, and the
stock dropped like a rock," said Peter Jenkins, the head of global equity
trading for Zurich Scudder, a money management firm. But he said that when
he questioned her, he learned that the price fell to $35, a 4-cent drop, or
less than the old drop of one-sixteenth she might have encountered. Because
that drop came in four increments, however, it felt worse.
"You've got to work a lot harder now, because prices are moving more," said
Mr. Jenkins, who was among a group of about 30 people, including
representatives of institutional traders, who met with Mr. Grasso yesterday
morning.
Some traders who buy and sell large blocks of stock say they believe they
have been "pennied" by specialists at the exchange. The specialists, floor
traders who are required to make markets in each stock, are suspected of
raising the bid price for a stock by a penny when they know there is a
substantial order for the stock at the lower price. The worst that is likely
to happen in that case is that the specialist can sell the stock at the
penny loss; the best is that he can get a profit if the price rises.
That was possible before, as well, but then the minimum change was 6.25
cents, so the possible loss was greater.
One change that everyone agrees needs to be made is for the exchange to
distribute more information about pending orders. Now the most readily
available information is the best bid price, and the amount of stock that
someone is offering to buy at that price, and the best offer price, with the
amount of stock that is being offered for sale.
The amounts at the best bid and offer price are clearly lower than they were
in the old system, but it is not clear whether there is less liquidity
within the 6-cents range that used to be covered by the minimum quote move.
For example, the best bid for a stock might be $47.05 a share, with only 100
shares being sought, while 50,000 shares were being sought at $47.04. That
lower bid, with lots of liquidity, is not visible now.
Another possible change covers the way that "clean crosses" are handled.
Such a cross comes when a broker has buyers and sellers at a given price,
and wants to process the trade through the exchange system. It is possible
for someone on the floor to get in on the trade if he or she is willing to
pay a better price, or sell for a lower price. Formerly, that better price
had to be at least one- sixteenth higher than the crossing price, and the
exchange could propose making that margin a nickel.
But to institute a rule that all bids have to move by a nickel would be
impossible for the stock exchange, because that would make it possible for a
competitive market to quote stocks a penny different and take in a lot of
extra business.
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Wall Street Journal
February 16, 2001
Money & Investing
Big Board Sets Up Committee to Study
Impact of Stock-Price Decimalization
Dow Jones Newswires
NEW YORK -- The New York Stock Exchange organized a group to study the
effects of the transition to quoting stock prices in decimals instead of
fractions, and to suggest any fine-tuning that is needed.
The group, which NYSE Chairman Richard Grasso described as an "umbrella
committee" of the exchange's various constituencies, hopes to have some
recommendations ready for the next meeting of the NYSE's board in April. Mr.
Grasso said any fine-tuning would be an ongoing process.
The Big Board's announcement followed a widely anticipated meeting held at
the exchange Friday morning, where NYSE officials and a variety of investors
and traders discussed the early impact of decimalization for more than an
hour.
Mr. Grasso repeatedly refused to be pinned down on one proposed tweak to
decimalization: whether to allow the use of five-cent increments in certain
stock trades. Right now, decimalization allows stock prices to move in
increments as small as a penny, but investors and traders have complained
that this has caused problems.
Mr. Grasso stressed that it's "way too early" to draw conclusions on the use
of penny-sized increments and other side effects of the NYSE's move to
decimal quotes, which began in August and was completed in late January. He
said that it wasn't up to him to decide what the minimum price variation for
stock prices should be, but said the committee would take the idea of using
five-cent increments in certain trades "under advisement."
He said that this tweak, which would likely need regulatory approval,
couldn't be made before April.
Friday's meeting at the NYSE followed a chorus of complaints from investors
and traders, who are upset about the adjustments in making the transition to
penny-sized increments.
One concern is that trading in pennies makes it easier for professional
traders to cut ahead of investors' orders.
"If I'm working an order for an institutional client and I want to represent
that bid using a limit order, the penny increments allow professional
traders, specialists and others, to step in front of that limit order by as
little as a penny," said Michael Rothberg, managing director and head of
program trading at Cantor Fitzgerald.
The "change to pennies has brought about concerns from all avenues of the
business," said Ken Sheinberg, head of listed trading at SG Cowen. Like Mr.
Rothberg, Mr. Sheinberg has concerns about being "pennyed" by specialists
and other traders.
Using five-cent increments in some situations may remove some of the
concerns of being pennyed. If adopted -- and whether this will happen
remains unclear -- this change would affect "clean-cross trades," where
investors agree on a price in a private transaction.
The concerns about being pennyed and about the NYSE's liquidity under
decimals have caused some investors to take their orders away from the Big
Board and into the so-called, off-exchange third market. Friday, Mr. Grasso
conceded that the exchange has seen some "erosion" among orders of 10,000
shares and up, but he noted that the NYSE's overall market share in the
trading of its stocks is actually up slightly.
But with this, as with all other aspects of decimalization, Mr. Grasso
cautioned that it's still too early to tell what the ultimate effects will
be.
Indeed, although the NYSE and American Stock Exchange have already moved to
decimals, many stocks still trade in fractions because the Nasdaq Stock
Market hasn't yet made the switch. That will start in March and will be
completed by April 9, the Securities and Exchange Commission's deadline.
Another side effect of decimalization has been the narrowing of spreads,
which measure the cost of executing an order to buy or sell stock. Lowering
spreads may lead to investor savings, regulators and securities industry
officials have said.
Although decimalization has been widely touted as a boon to small investors,
the problems that it causes institutions will hurt individual investors, Mr.
Rothberg said. That, he added, is because much of the institutional order
flow comes from institutions such as mutual funds and pension funds that
represent the pooled funds of millions of individual investors.
