Capital Markets

Decimal Shyness

Other exchanges have converted, so why is the Nasdaq still squeamish?
Andrew OsterlandJuly 1, 2000

The Nasdaq market, home of the biggest and baddest tech stocks in the world, likes to bill itself as the stock market of the next century. The next century has arrived, but Nasdaq hasn’t.

On July 3, U.S. exchanges were supposed to convert to the decimal pricing practice the rest of the world uses, rather than the archaic fractional system they currently employ. Pricing stocks in decimals should improve liquidity and execution quality.

The New York Stock Exchange and the major electronic communication networks (ECNs) that trade stocks on computer networks say they’re good to go, but Nasdaq isn’t. NASD chief Frank Zarb warned SEC chairman Arthur Levitt that Selectnet, Nasdaq’s unwieldy trading network, might break down because of the expected surge in communication and trading volume that a switch to decimal pricing would cause.

Several of Nasdaq’s competitors think the exchange is simply dragging its feet. VTI Island ECN, which handles about 10 percent of Nasdaq trading volume, intends to go decimal on the July 3 deadline as originally planned. “This will yield billions of dollars of benefits to investors over the next few years,” says Island president Matt Andresen.

That’s exactly what Nasdaq market-makers are afraid of. The margins they make buying and selling stocks at minimum spreads of 3 cents (1/32), and more often 6 cents and higher, have already been squeezed since “teenies” (1/16) came into being.

The Securities Industry Association has proposed a pilot program for 30 of the largest U.S. stocks to go decimal in September, and if all goes well, to make a full conversion by next March.