Like them or not, pennies are likely here to stay, New York Stock Exchange Chairman Richard Grasso said Friday.
Grasso met with about 30 individuals representing all aspects of trading at the exchange early Friday, following reports that a new system of trading in one-cent increments begun at the NYSE on Jan. 29 -- so-called decimalization -- was causing institutional investors difficulty filling their large orders.
"It's not my, nor this institution's place to get into the business of fixing the minimum variation for the U.S. markets," Grasso said. "People understand that in the decimal-based world, there are 100 pennies to the dollar."
Grasso, however, said the exchange may consider changing one of its own rules, to require an increment of no smaller than a nickel for certain specific trades called "clean-cross trades" that affect institutional buyers in prearranged transactions.
And while he cautioned against drawing any conclusions about decimalization after it's been in effect only three weeks, Grasso said a committee of NYSE trading interests will study the effects of the change and report to the exchange's full board by its next meeting in April.
Until last year, securities were traded on the exchange in increments of one-eighth or one-sixteenth of a dollar. The NYSE began the change to trading in decimals on some pilot stocks last year and converted for all of its 3,500 listed issues last month. The
market is scheduled to start converting to decimal trading next month and finish by an April 9 deadline set by the
Securities and Exchange Commission
"What we need to do is recognize that there are some consumers who want nickels, there are consumers who want pennies," Grasso said, referring to trading increments. "How do we accommodate the large majority of users in the marketplace?"
Early results of the shift to trading in decimals at the
showed that penny increments brought about one effect the change's supporters had wanted. It reduced the "spread" -- the gap between the price buyers offer and the price sellers ask for stock.
Reducing that spread has been touted as a way to save investors money, particularly individual investors.
But decimal trading also reduced "depth," the amount of stock available at any given price, the early results showed. That made it potentially difficult for institutional investors to trade large blocks of stocks at one price.
Grasso said any changes the exchange makes to address that will likely happen by July 4.
He also noted that what effects institutional investors also touches individuals, because many individual investors are involved in the markets through pooled arrangements, such as pension and mutual funds.
"I'm not so presumptuous to think we have solutions," he said. "One doesn't make structure changes in the marketplace based on three weeks of experience."
Grasso insisted there is "no confidence crisis" in the specialist system. The comment was a reference to talk that specialists, the firms that manage the auction of stocks on the trading floor at the exchange, were using 1-cent increments of the new decimal system to step in front of institutional orders and take a profit in turn.
"A lot of the frustration is in the newness of the price table," he said. "But clearly I think we have a wholly different world today with a hundred price points per dollar."
"We've got to step back and say to ourselves, do the rules that governed trading in eighths for time immemorial, sixteenths for the past three years, do they fit a penny spread environment?"