(February 12) – “Pennies from hell? For professional stock traders, the recent move to decimal-based trading on the New York Stock Exchange hasn’t been all heavenly,” writes Jeff Opdyke in today’sWall Street Journal.

“Many traders are complaining, the exchange acknowledges, that the historic shift to trading in one-cent increments has had negative side effects. And some traders at mutual funds and other institutions worry that the new way of trading allows the NYSE specialist firms on the floor to step in front of large, institutional orders in hopes of skimming tiny profits here and there.”

“Because of the complaints, NYSE Chairman Richard Grasso has scheduled a meeting this week with a group of traders specifically to discuss concerns with decimalization. NYSE officials on Friday said they weren’t certain when the meeting would occur. But they confirm that it was prompted by ‘ongoing conversations with customers,’ specifically so-called institutional traders from the mutual funds and elsewhere, who represent the bulk of NYSE trading. The NYSE declined to comment further on the matter.”

” ‘It’s no surprise that [Mr. Grasso] is meeting with traders, because of the complaints coming out,’ says Michael Rothberg, a managing director at Cantor Fitzgerald, a New York brokerage firm. Mr. Rothberg isn’t part of the group meeting with the NYSE chairman.”

“For individual investors, the move to decimals has been a boon so far. Under the new way of trading, stocks are quoted in one-cent increments, in contrast with fraction-based quotations like 1/8 and 1/16 that had been the U.S. stock market’s tradition going back more than 200 years. When a stock moves 1/8 at a time, it is actually moving 12.5 cents at a time; but with decimals, a stock has the ability to move in much-smaller increments. The NYSE since Jan. 29 has quoted all of its stocks in decimal form, and the Nasdaq Stock Market intends to do so as well in coming weeks.”

“The Securities and Exchange Commission pushed for decimalization, figuring that it would lower costs for investors when stocks can move in tinier increments. And, indeed, the spread between the bid price (the buyer’s highest offer) and the ask price (the seller’s lowest offer) has been narrowing in many instances, meaning small investors are getting better prices.”

“The NYSE has said that this tightening ‘is particularly beneficial to small investors and those trading in the most-active stocks. The exchange will continue to monitor the impact of decimalization for investors.’ “

“But institutional traders with hedge funds, mutual funds, pension funds and program-trading desks say the new way of quoting prices has its problems for them. Mr. Rothberg notes that because of decimalization, a new word has entered Wall Street’s lexicon: ‘pennyed’ — as in, “we’re getting pennyed by the specialists,” he says.”