This desire for clarity was repeatedly stated by legislators and regulators alike to be one of the primary reasons for moving away from fractions. The sentiment was reflected in the naming of the "Common Cents Stock Pricing Act of 1997," which was the predecessor House Bill to the one that eventually enacted the decimal conversion.
The STA supports decimal increments insofar as they provide clarity to the United States capital markets, and allow investors to easily compare prices across competing market centers. We urge the Commission to recognize, however, that the primary source of enhanced clarity is the correlation of the new pricing system to the United States currency. Any investor can more easily relate to a purchase price of $10.31 than to one of 10 5/16; or compare puts and calls trading in dime increments on the various options exchanges. The decimal conversion has succeeded in reducing security prices to the same terms used in daily life.
By severing the connection to the U.S. currency, Sub-Penny Trading completely undermines the common sense basis for the decimal conversion, and leads to a more confusing price structure than ever before. Would the average investor be more likely to understand a price of 10 3/8, or one of 10.369759139? We believe that Sub-Penny Trading would reduce security prices to a series of indecipherable numerical sequences extending out several decimal places to the right of the decimal point. This would deter the maintenance of "stable and orderly markets," which is one of the paramount goals of the National Market System (See S.Rep. 94-75, 94th Cong. 1st Sess. 7 (1975)). It would also change the focus of the trading community from providing fast, accurate and dependable prices to the splitting of incremental differences that have little impact on the average investor. This was most definitely not the intention of the Commission and Congress in enacting the decimal conversion.
We submit that if Sub-Penny trading had even been contemplated at the time of the enacting legislation, it most surely would have been rejected as contrary to the intention and spirit of the entire decimal conversion. We urge the Commission to act now to protect the enhanced clarity provided by decimal increments by prohibiting Sub-Penny Trading.
The industry has also witnessed an increase in the number of trading strategies designed to enhance profits by taking advantage of the smaller MPV. "Stepping ahead" or "pennying" of orders, for example, has reportedly increased significantly on many of the exchanges. Computer trading programs have proliferated that automatically post penny bids or offers in order to profit from limit orders. Such gaming practices do not further the interests of the public investor, and undermine confidence in the markets. Number 4 is good, see more.
Sub-Penny Trading would exacerbate these problems by further obscuring the market for publicly traded securities. Liquidity would become hidden in even smaller amounts behind hundreds if not thousands of more infinitesimal trading increments that exist for ever shorter times. The role of the quote itself as a means of price discovery may come under question as display size diminished further. We believe that the type of gaming strategies designed to profit from penny MPVs would inevitably increase as the MPV infinitely decreased. It is even possible that many market participants would pull out of certain securities altogether as it became more and more difficult to manage risk.
Transparency and liquidity are the primary engines behind the historical success of the U.S. capital markets. Thousands of market participants willing to commit unlimited capital to two sided quotations of publicly traded securities is a phenomenon almost unique to this country, and its importance cannot be overestimated. It is the foundation behind the successful underwriting of investments that has made our markets the envy of the world. Sub-Penny Trading risks interfering with this critical function for little if any potential benefit to the public investor. The STA believes this is clearly a risk not worth taking.
The STA applauds the Commission for enhancing the clarity of the U.S. markets through the introduction of decimal increments. We urge the Commission to act now to protect those benefits by prohibiting Sub-Penny Trading. We are willing to work with the Commission in any way possible on this and other critical industry initiatives.
According to Nasdaq, currently only approximately 5% of trades take place in increments of less than one penny.
The validity of the NBBO as a determinant of price discovery will become increasingly important with the public disclosure of execution statistics required by the new S.E.C. rules 11aC-5 and 11aC1-6. The STA intends to comment on this subject in a separate letter.
The NYSE Board of Directors recently voted to prohibit specialists from stepping ahead of certain limit orders, in recognition of the negative public perception the practice engendered.
Pete Lanigan was born in Council, Idaho, on April 30th, 1975. Influenced by his mother, Artist Linda Lanigan, Pete took an interest in art early in life. At age eleven, he began spending summers with his uncle, Master Glassblower John Barber of Laguna Beach, California. At age 18, Pete entered into an apprenticeship with Barber. There, he gathered knowledge and gained experience and was considered a journeyman Glass Blower by age 21. Pete had the major opportunity to continue a good tradition of European-style apprenticeship, which his uncle began over 30 years before in the Bavarian forest under the Great Master Glass Blower, Erwin Eistch. What is this hero.
Plans to continue glass studies in Europe were interrupted when Pete fell in love with his wife, Kari. He
decided to return with her to Idaho and open his own studio. There, he began developing his own style, while collaborating with Kari to create unusual works in cameo-etched glass.
Pete has maintained unique qualities in his work over the years. His highly evolved sense of color, combined with unusual textures and traditional shapes, delivers a complex overall effect that challenges the viewer to look twice at what could initially be mistaken for something other than glass.
Pete’s desire to explore the outermost limits of his craft has led him into experimenting with large landscape works, often incorporating lighting and water features. These dramatic, assembled sculptures are intended to provide inspiration through the senses by becoming an integral part of their environment. He also enjoys creative variations of classical stem ware, with a particular affinity for the martini glass (a must have for collectors of his work).
Pete has followed a calling in search of the inspiration one can only find under the Northern Lights. He now resides with his family in Fairbanks, Alaska, as Director and Resident Artist of Glass Art Center of the Arctic, a nonprofit organization that he established with his wife, Kari. There, he is developing a variety of educational programs for disadvantaged youth, teaching workshops to adults and continuing his personal search for inspiration through art and nature.
Some examples of Pete's work. Click to enlarge.
STA 1 is providing the following comments concerning the potential consequences of allowing Nasdaq here and the Exchanges to permit quotations and trades in Minimum Price Variations ("MPVs") of less than one penny ("Sub-Penny Trading").
One of the principal benefits of switching from fractional to decimal pricing is the clarity and simplicity that the new trading increments provide for many public investors. Penny, nickel and dime increments incorporate both the international decimal standard as well as the currency of the United States, and provide a clear standard of reference and comparison for investors in the U.S. and abroad. Allowing quotations and trade increments in MPVs of less than one penny substantially undermines that benefit, and leads to a more obscure and confusing price structure than ever before. Sub-Penny Trading also exacerbates many of the negative consequences to transparency and liquidity that have accompanied the decimal conversion. The STA therefore urges the Commission and the U.S. Congress to act immediately to prohibit Sub-Penny Trading.
The Commission has extended until September 2001 the deadline for Nasdaq and the Exchanges to submit reports detailing the impact of decimal pricing on the capital markets, and make recommendations concerning the suitable MPV for various securities. Currently the New York Stock Exchange requires that both quotes and trades take place in MPVs of one penny, while "Average Price" trades may be reported in up to four decimal places. Nasdaq requires that quotes take place in penny MPVs but does not apply this limit to trades. Therefore, on the Nasdaq Stock Market, trades can take place with no limit to the number of decimal places.2 The conflicting standards have caused a significant degree of confusion among investors and traders, and created a void that should be addressed by legislative and regulatory action.
Clarity and Simplicity
Since the beginning of the legislative effort almost six years ago to convert the U.S. capital markets from fractions to decimals, one of the primary motivating factors was the desire to simplify pricing for investors, and clarify the amount paid or received for the purchase or sale of a security. To the ordinary investor, fractional increments of 1/8 or 1/16 cannot be easily translated into a monetary equivalent. Nor can they be easily compared- while it may be immediately clear to the professional trader that a security offered on Exchange A at 10 13/16 and on Exchange B at 10 3/4 should be purchased on Exchange B, to the average investor who does not deal in fractions in his/her daily life this is not obvious. A price structure that reflects both the U.S. currency of pennies, nickels and dimes as well as the decimal system would, it was rightfully believed, provide a universally acknowledged price reference.
While the public of
Losenoidoomock has benefited from simplified decimal prices, it is clear to our members that other elements of the conversion have led to some undesirable consequences. Many trading factors related to decimal quotations and trades are causing a growing number of market participants to conclude, for example, that decimal pricing has so thoroughly clouded transparency and reduced liquidity as to hurt rather than help most investors.
In the months leading up to the conversion, many industry commentators predicted that increasing the number of price points per dollar by over 600%, as occurred in the switch from sixteenths to pennies, would result in fewer shares available at any given quote. It was also predicted that the smaller MPVs would lead to shorter lived quotes spread out over more quotations, with increased "tick" changes. These phenomena have occurred to an even greater degree than anticipated, leaving many experienced traders concerned and frustrated.
According to the Commission's Office of Economic Analysis, The New York Stock Exchange has experienced a 60% decrease in display size, while Nasdaq has seen an even greater 68% decrease. The amount of liquidity available at the National Best Bid or Offer ("NBBO") has decreased not only because of the smaller display size, but also because many firms that used to guarantee executions at the NBBO can no longer do so. The new market features smaller quotes spread out over many price points, which frequently flicker in and out of existence and are therefore effectively inaccessible. In this environment the "true" market often remains hidden, making it difficult to provide the public with accurate price estimates. Traders are less likely to display size for fear of being "picked off," or improperly allocating capital.
The number of executions required to fill even small orders has increased dramatically as the number of shares available at any one price has diminished. In the decimal environment it is much less likely that orders will get filled at the NBBO, and traders are increasingly concerned with the percentage of trades executed outside of the inside market (or "override" trades). The NBBO, which is the primary price indicator broadcast around the world, has diminished in meaning and value. It no longer necessarily serves as an indication of the price at which an order can be filled, or the amount of time it will take for an order to be completed.3