FINRA Manual: Contents
|View Whole Section||Text only||Print Manager||Link|
97-41 NASD Requests Comment On Use Of Decimal Pricing In The Nasdaq Stock Market
Comment Period Expires: July 15, 1997
In the following document, NASD® requests comment on the positive and negative effects of decimalization on investors and the securities industry.
Questions concerning this Request For Comment, in particular the form at for any data that may be provided, should be directed to Jeffrey Smith, Office of Economic Research , NASD, at (202) 728-8032.
Request For Comment
The NASD encourages all members and other interested parties to comment to ensure that its review of this issue evaluates and analyzes the costs, benefits, and other implications of decimalization as fully as possible. All comments received will be available to the public unless the commenters request confidentiality in their submissions.
Comments can be mailed to:
Office of the Corporate Secretary
1735 K Street, NW,
Washington, DC 20006
or e-mailed to:
To be able to conclude the NASD's review within a reasonable period of time, comments must be received by July 15, 1997.
As a part of its continuing review of the appropriate quote and trade increments for stocks that are traded in The Nasdaq Stock Market, Inc. (Nasdaq®) , the NASD® has determined that the issue of decimalization in Nasdaq should be thoroughly evaluated to analyze the potential gains for investors that may be achieved. As a part of its review of the issue, the NASD believes it is important to obtain inform ation about the positive and negative effects of decimalization on investors and the securities industry from as wide a range of constituents as possible. The NASD also preliminarily believes that the costs entailed in decimalization may be alleviated by setting a firm, future date for the transition.
Accordingly, through this Request For Comment and other means, the NASD encourages investors, NASDmembers, Nasdaq issuers, information vendors, and any other interested parties to provide the NASD withcomments, views, and studies regarding the effects that a move to the use of decimals for quoting and trading purposes may have on Nasdaq-listed stocks. Comments should be received by July 15, 1997, for such views and analyses to be incorporated into the NASD's evaluation of the issue.
During recent years, the NASD and Nasdaq have carefully reviewed the benefits and the costs of trade reports and quotations priced in narrower increments. For example, in 1994, the Nasdaq system was revised to accept trade reports in increments as small as 1/256ths. Further, earlier this year Nasdaq proposed to reduce quotation increments to sixteenths for all Nasdaq stocks.1 Nasdaq's purpose in doing so was to improve the transparency of the market, provide investors with an opportunity to receive better execution prices, facilit ate greater quote competition and narrower spreads, and promote the price discovery process.
In addition, the U.S. Congress recently held hearings related to the issue of the use of decimals in the U. S. stock markets. In particular, the hearing focused on proposed legislation called the Common Cents Stock Pricing Act of 1997 (H.R. 1053).2 This bill would require the Securities and Exchange Commission (SEC) to promulgate, within one year of the bill's enactment into law, a new rule that would require the quotation of equity securities traded on U.S. exchanges in dollars and cents. Under the proposed law, the SEC would be permitted to set an implementation schedule regarding the period in which the securities industry would ready itself to trade in stocks priced at decimals instead of fractions, the current general practice in U. S. equity markets.
Along with other U.S. stock markets ,the NASD testified at this hearing and promised to conduct a study that would allow the NASD to evaluate the costs and the benefits that may be associated with a shift to decimalization. The NASD agreed to provide the results of this analysis to the congressional committee that is considering the bill.
The NASD's plan for this study includes: a review and interpretation of the relevant literature, in particular a ny academic research that has evaluated decimalization or related issues; a study of other markets with experience with decimalization; and an analysis of the technology impact that a change to decimals would have on Nasdaq trading and regulatory systems, based on current experience in the Nasdaq market. This study will play an important part in the NASD's consideration of the decimalization issue
If the NASD's review of this issue demonstrates that a shift to decimal pricing aids investors in the purchase and sale of Nasdaq stocks, the NASD is committed to undertake the necessary technological changes to provide this benefit for investors. A critical component of a conversion to decimalization is the technology that supports Nasdaq systems, and those operated by member firms and information vendors. The NASD currently has scheduled changes to its systems that would permit the use of decimals, if appropriate, before the end of 1998. This technical preparation should not be interpreted as a predisposition by the NASD to move forward with decimalization.
The NASD recognizes, however, that member firm and vendor systems would also have to be converted to permit trading in decimals and that other technology-intensive projects, such as preparations of systems for the Year 2000 project and for complying with the recently adopted SEC Order Handling Rules, are consuming significant resources in the industry. Because of these concerns, the NASD believes that if conversion to decimals is appropriate, implementation of decimalization should occur on a date when the NASD is certain that all participants can be technologically ready, with full consideration given to the other significant technology projects that members are currently dealing with, such as Year 2000. Accordingly, as discussed below, the NASD believes it is appropriate to obtain additional information on the effects that decimalization may have on the securities industry as a whole, including the feasibility, appropriateness, and timing of implementing any change.
To make its review of the decimalization issue more complete, the NASD believes that it is very important that it obtain views from others that may be affected by any change to decimals in the U. S. equity markets. Consequently, the NASD is seeking to obtain the views of all interested parties, supported by as much empirical evidence as possible, on the costs and the benefits that could result from any shift to decimal pricing. The NASD plans to reach as wide a range of constituents as possible through this Notice and other means. That is, the NASD wishes to receive comments on decimalization from investors, NASD member firms, Nasdaq issuers, information vendors that distribute Nasdaq price information, and other interested parties that may have views on the benefits and the costs related to conversion to decimals.
To sharpen the focus of commenters on the issues, the NASD requests that commenters provide information on the following questions. The questions set forth below are not intended, however, to limit the information that commenters should provide. If commenters believe other issues related to decimals should be add ressed in the NASD's review and they have inform ation related to such issues, the NASD welcomes such input.
1 On May 27,1997,the Securities and Exchange Commission approved the NASD rule filing on this issue. Accordingly, on June 2, 1997, all Nasdaq-traded stocks are eligible to be quoted in increments of a sixteenth.
2 On May 21,1997,the House Commerce Committee's Subcommittee on Finance and Hazardous Materials approved the bill and voted to send the bill to the full Committee for consideration.