Decimalization of securities-pricing has adversely affected market liquidity and transparency, according to a survey of buy-side institutional traders by Midwood Securities Inc., a New York-based securities brokerage firm.

More than 75% of the responding traders, working for a wide range of institutional investment management firms, say they have altered trading strategies because of the decimalization mandate by the Securities and
Exchange Commission in early 2000. The NYSE and Nasdaq phased in implementation of this change in August 2000 and March 2001, respectively.

Under decimalization, the incremental difference between the best price to buy a share and the best price offered to sell a share, known as the spread, was changed to one penny from one-sixteenth of a dollar. Regulatory bodies are soliciting opinions through January 2002 with the intent of subsequent
regulatory action.

“Analysis of the responses strongly suggests decimalization hasn’t been beneficial for the institutional marketplace and could, over time, lessencompetition as participants curtail activities in certain areas of the
securities business or alter their business and trading strategies,” says Terry March, president and CEO. “This is especially true as both sell-side capital commitments are reduced and market liquidity is
negatively impacted, issues which have been identified as major concerns of more than three-quarters of responding traders.”

Of those reporting a change in trading strategies, nearly 60% have opted to trade smaller orders, almost 50% have increased the use of limit orders, and more than 70% have made some changes in executing orders, including increased use of ECNs. In addition, more than 50% of respondents said their
trading costs, such as those for systems, compliance and administration, had increased. But the largest increase in costs was due to direct market impact, the degree to which an order affects the market price.

Nearly 100 traders of about 600 queried responded to the survey, a return rate of about 15%. The traders, all on the buy-side, work for firms with assets under management of between $500 million and $700 billion.