(May 19) – “The Nasdaq Stock Market isn’t prepared to begin trading in decimals this year, but it won’t stand in the way of markets that are ready,” writes Judith Burns in today’s Wall Street Journal.

“The National Association of Securities Dealers said in a May 10 letter to the Securities and Exchange Commission that, ‘Nasdaq will not be an impediment to decimalization of the exchange-listed market, on either a full or pilot basis in September 2000’. The letter was one of many responses to the decimal issue, from both exchanges and brokerage firms, that were filed with the SEC and are publicly available.

“Last month, Nasdaq announced it couldn’t meet the SEC’s industrywide order to start trading stocks in dollars and cents, instead of dollars and fractions, by early July.”

“That prompted the SEC to ask whether it should require all U.S. markets except Nasdaq to begin decimal trading in September, or start off slowly, with a small pilot program that limits decimal trading to a few dozen stocks.”

“The rival New York Stock Exchange has suggested doing both: Start with a pilot, then quickly move to full-blown decimal trading. In a May 16 letter, the NYSE said it is ready for decimal trading, but would prefer to start trading a few stocks in one-cent increments, followed by a larger pilot involving about 50 stocks. ‘We believe that expansion to all NYSE-listed stocks could prudently occur after approximately 60 days’ of testing, the NYSE said. It stressed that ‘we would be prepared to deliver’ on that schedule.

“From a technical standpoint, the NASD said it appears possible to have NYSE-listed stocks trade in decimals while Nasdaq sticks with fractions. The NASD has said it is prepared to handle either a pilot program or a ‘dual pricing’ system. It ‘will also be ready to initiate decimal pricing in Nasdaq securities on March 31, 2001,’ the NASD added.

“Insufficient computer capacity is preventing Nasdaq from adopting decimal trading now, but the NASD said that won’t be a problem with a pilot or with dual pricing, since exchange-listed stocks account for just 6% of Nasdaq’s daily trading volume, and trading in them is growing at a much slower rate than trading in Nasdaq-listed shares.”

“But, other industry participants foresee big problems if some markets adopt decimal pricing ahead of Nasdaq. ‘Having one entire market trade in decimals while another market trades in fractions would create undue systemic risk, investor confusion and most likely a substantial increase in quote and trading volume,’ Depository Trust Co. has warned. It said the safest course would be to start a pilot after Sept. 25, when the stock-options expiration cycle ends.”