What Happened To The Decimal System?
Investors 1, Wall Street 0. That was the score last summer when the stock exchanges reluctantly agreed to switch their price quotations from fractions to dollars and cents. Stock prices quoted in pennies instead of sixteenths of a dollar would make equities trading easier to understand and bring the U.S. in line with the rest of the world's major exchanges. More important, it would almost certainly narrow the spread between bid and ask prices, thus saving investors money.
The Big Board, with much fanfare, even said it hoped to make the transition by 1999. The Securities & Exchange Commission, which had been lukewarm toward decimals, jumped on the bandwagon and scheduled a series of meetings to coordinate the switchover. On Capitol Hill, key lawmakers pushing legislation to require decimal trading declared victory.
What a difference seven months makes. Now, decimalization is not only off the front burner but unlikely to take place until 2001--a full two years later than original projections. Stock exchanges, Wall Street firms, and the SEC have quietly agreed that the move to decimals requires far more study than they first thought, and that other software design changes, such as the Year 2000 project, must take priority.
BIG SPREAD. Congress is not pleased. Key lawmakers in both parties are asking for an investigation into whether the delay is legitimate or a last-gasp attempt to preserve wider spreads--the difference between the price an investor gets when selling shares and the price a broker charges to buy them--and fatter profits. Former SEC Commissioner Steven M.H. Wallman, seen by many as the driving force behind decimals until he departed the agency last fall, calls the delay lamentable. "Artificially wide spreads are costing investors billions of dollars," he says.
Decimalization looked like a fait accompli just seven months ago, when the Big Board announced it would make the switch. Earlier, the SEC required securities firms and electronic brokers such as Instinet to integrate their order books and thus make equity markets more competitive and accessible to all investors. The SEC acted after a lengthy investigation revealed that NASDAQ traders were conspiring to keep spreads high on many stocks. Under pressure from the SEC and influential legislators, the exchanges last June began quoting in sixteenths, or 6.25 cents, down from eighths, or 12.5 cents. On the NASDAQ, spreads on stocks priced below $10 now can go as low as one-thirty-second of a dollar, or 3.125 cents. Since June, spreads have declined one-third, saving investors about $1 billion, according to preliminary studies.
Wall Street officials deny that decimalization's delay has anything to do with industry profits. Instead, they cite competing demands to reprogram and test trading software. Brokers already are under SEC marching orders to install expensive new audit-trail software allowing regulators to eavesdrop on how dealers handle customer orders from the time a phone call is placed to settlement. Delays on that system, known as OATS, or the Order Audit Trail System, are likely to push back implementation to 1999. Securities firms insist they don't have enough money, staff, or time to recode software to handle OATS, make the massive adjustments needed for the Year 2000 problem, and simultaneously reprogram for decimals. Says Richard R. Lindsey, director of the SEC's Market Regulation Div.: "There is a risk of pushing so hard for decimals that we screw up the Year 2000 project. That would be disastrous."
SKEPTICS. Lindsey believes the industry can be ready for decimals by the middle of 2000. But that may be optimistic, says Bernard L. Madoff, owner of the New York market maker that bears his name. Madoff says his firm is decimal-ready because its overseas business is conducted in dollars and cents. Still, most of Madoff's customers--other broker-dealers--as well as clearance and settlement companies say they need the time to prepare for the switch.
Despite the industry's technological excuses, skeptics abound on Capitol Hill. Representatives Michael G. Oxley (R-Ohio) and Edward J. Markey (D-Mass.) want to spur industry into acting sooner and want to know if securities firms are deliberately slowing the pace of change. Oxley chairs the House Commerce subcommittee on finance, and Markey is a panel member.
The lawmakers are expected soon to ask Congress' investigative arm, the General Accounting Office, to study the reasons for the delay and report on which firms and exchanges can make the transition sooner than 2001. Oxley plans to hold hearings on the issue sometime this spring. Brokers had better gear up to explain why they can trade commodity futures, currencies, and foreign stocks in decimals, but not U.S. equities.