In testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Donald Kittell, executive vice president of the Securities Industry Association, described mixed results with the industry’s shift to decimalization.

Kittell said the securities industry spent over US$1 billion collectively on the transition to decimals, and the results of the experience are inconclusive, at least as far as investors and market makers are concerned.

He noted that message traffic hasn’t increased as much as was expected by its early research. However, the expected reduction in quoted spreads has materialized. “Decimalization has resulted in significant reductions in the quoted spreads reported by market centers. The reduced spreads have given rise to conjecture as to the impact of decimalization on specialist and market maker profitability, the future viability of payment for order flow, the prospect of Nasdaq market makers introducing commissions on top of “net trades,” a possible increase in proprietary trading by market makers, the potential for capital being withdrawn from unprofitable market making activities and other issues of concern to market makers.”

Kittell oberved that firms are addressing these issues individually and in conjunction with trading and regulatory committees. He said that at this point it’s too early to tell what the ultimate result will be for market makers, and that it may be many months before the SIA will have a good handle on its impact.

As for investors, Kittell also concluded that the impact is uncertain. He noted that: the simpler “language” of decimals is a benefit, and the harmonization of decimals across financial products and across international markets is a benefit. The SIA remains skeptical about whether decimalization will produce huge savings for investors, and whether it has improved global competitiveness.

He observed that SIA firms report complaints from both institutional and retail customers relative to the number of trades and the time required filling an order. Institutional firms report complaints about their inability to see displayed depth and to find liquidity.

“Conclusions about market liquidity, trading volume, volatility, transaction costs, and the relative economic impacts upon market participants — institutional and retail customers as well as market markers and specialists — would, in our judgment, be premature until trading behavior settles down over the course of many months. We also suspect that it will be difficult to generalize these conclusions because experience will vary by type of security, type of market center and type of customer. Further, the experiences of each of these groups will vary as market activity changes over time.”