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A pilot test of decimal stock trading has reduced the gap between bid and asked prices for the securities, as expected, but also has affected shares in a way that could be troubling to regulators and investors alike,

Securities and Exchange Commission


Arthur Levitt

said Thursday.

The switch to decimals from fractions for a sample of stocks on the

New York Stock Exchange

, which began at the end of the summer, has resulted in dramatically smaller quantities of a particular stock being offered at a given price, Levitt said.

"As usual, the market has thrown us a few curves, suggesting forces at work that few predicted," Levitt said in a prepared speech to the

Security Traders Association

in Boca Raton, Fla.

That quote size -- the number of shares offered at a given price -- is significant because it affects how meaningful a quoted price is, and the so-called depth of a stock. When quote sizes are reduced, the question then becomes: If an investor places an order for a stock at a listed price, but can't buy it because the number of shares available at that price is small (due to decimal trading), how credible is the price quote?

But Levitt cautioned that the pilot program results are so preliminary that it's difficult to reach even tentative conclusions.

Still, he said an analysis of the decimal trading on the Big Board stocks so far found no dramatic increase in volume of trades -- contrary to what some experts had predicted would happen.

The NYSE, which provided the SEC with the preliminary analysis, declined to comment on Levitt's statement or on the perceived reduction in quote sizes with decimal trading. "We're continuing to evaluate the impact" of the decimal conversion, NYSE spokesman Ray Pellecchia said.

The pilot program

began at the end of August, with the conversion of 13 stocks on the NYSE and the

American Stock Exchange

to trading increments of one penny rather than eighths of a dollar, which has been the standard for decades. A second phase of the test began last month with conversion of a total of 64 stocks on the NYSE and 48 stocks on the Amex. The test is a precursor to the scheduled full conversion of U.S. securities markets to decimal trading by next spring.

The conclusions Levitt quoted were bolstered by a second analysis of the decimal pilot program released Thursday. That analysis, by

Purdue University

associate professor Sugato Chakravarty and

University of Memphis

professor Robert Wood, found a dramatic reduction in quote size in the stocks converted to trading in decimals.

Their analysis also found decimal trading had shrunk the spread between bid and asked prices for securities.

Reducing that spread has long been a goal of supporters of the shift to decimal trading, including Levitt and

members of Congress, who've maintained that bringing the purchase and offer prices closer together could save investors millions of dollars.

If decimal trading is reducing quote size, that calls into question one of the fundamental benefits the NYSE purports to offer investors compared with electronic exchanges like the


and electronic communications networks, or ECNs. Trades on the Big Board are handled by an auction system in which buyers' orders are coupled with sellers' offers on the exchange's physical trading floor. That arrangement has offered a "depth" that electronic exchanges can't rival, the NYSE has claimed.

The NYSE also has said it is ready for full decimal trading, while Nasdaq held up the overall conversion of the U.S. markets until next year,

claiming its technology wasn't prepared to handle the anticipated increase in quote traffic with penny trades.

A reduction in quote size due to decimalization also raises questions about so-called transparency, or the ability of investors and other market participants to see how many shares are being offered or sought at a given price.

"Within a few months, penny increments will prevail market wide," Levitt said Thursday.

"Seriously, I know there are important differences of opinion about how, and for some, even whether to move towards deeper pricing transparency in our markets," he said. "If, as a marketplace we fail to embrace a level of transparency clear enough for penny increments, there will be no good excuse behind which we can hide."