BUSINESSWEEK ONLINE : FEBRUARY 21, 2000 ISSUE
BUSINESSWEEK INVESTOR Commentary: Should You Be Scared of Decimal Stock Pricing? For more than two centuries, Wall Street has counted money in the same units that 17th century pirates used--pieces of eight. This summer, fractional pricing--pricing stocks in eighths, sixteenths, and the occasional thirty-second of a dollar--will finally go the way of Spanish doubloons, as stock and options markets switch to decimal pricing. The move will come as a relief to anyone who's ever struggled to translate 17 7/16 in dollars and cents. But investors will still need to watch for dark sails on the horizon. Fans of decimals trumpet the savings that individual investors will reap. The first step--pricing stocks in 5 cents increments, instead of the standard sixteenths, or 6.25 cents--will indeed yield savings. The smaller ''tick'' should shrink dealers' spreads--the gap between what market-makers will pay for a share and the price at which they'll sell--by 20%, helping investors at the expense of dealers. HOST OF RISKS. But shrinking the tick will also alter the dynamics of trading--especially if, as proposed, markets next switch to trading in penny increments. Research shows that the smaller the tick, the more likely prices are to ''flicker,'' or change rapidly, as active traders try to outmaneuver each other. Even the Securities & Exchange Commission admits that its short-sale rule, aimed at slowing bear raids by barring short sales of a stock when its price is falling, probably couldn't be enforced. Penny trading also undercuts other rules designed to protect investors. Say you place a limit order to buy 1,000 shares at $20. Your broker might want to buy the same stock for its own account. Under today's rules, the brokerage can't ''step in front'' of your order--which might keep you from getting the shares you want--unless the firm is willing to pay a sixteenth more, or $20.0625, and put $62.50 at risk. With penny trading, the brokerage might be allowed to outbid its customer at just $20.01. The firm's risking only $10, because it knows it has a ready buyer--you--if the price falls. If the price rises, you miss out on the profit; if the price falls, you're stuck with a stock in decline. Shrinking the tick also will make market quotes less accurate. Rather than offer to sell 1,000 shares at $20, a dealer might try to make a bit more by offering 200 shares at $20, 200 at $20.01, and so forth. Individual investors might be frustrated to learn that even small orders can't be filled at the quoted price. ''You might end up with four different prices on a 2,000-share purchase,'' says Richard Ketchum, president of the National Association of Securities Dealers, which owns the Nasdaq market. The SEC knows the switch to smaller ticks raises a host of risks. It's ordered Nasdaq and the stock exchanges to phase in decimal trading. On July 3, stocks and options of 30 as-yet unnamed companies will start trading in 5 cents increments. A month or so later, nickel trading will be extended to all stocks and options, and the initial 30 issues will be used to test the big change--penny trading. Based on that experiment, the markets and the SEC will decide whether to trade in pennies, nickels, or both. By moving cautiously, the SEC hopes it can uncover pitfalls and fine-tune its rules. Decimal pricing is long overdue, and its clarity and smaller spreads will probably reward small investors over time. But pennies from heaven? Not right away. By MIKE MCNAMEE McNamee covers investing from Washington. To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Commentary: Should You Be Scared of Decimal Stock Pricing? TABLE: Decimal Pricing Pros and Cons INTERACT E-Mail to Business Week Online

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