Newspaper article THE JOURNAL RECORD

Lowering Trading Increments May Wound Stock Middlemen

Newspaper article THE JOURNAL RECORD

Lowering Trading Increments May Wound Stock Middlemen

Article excerpt

NEW YORK -- Wall Street's middlemen could lose as much as $3 billion a year as the U.S. securities industry adopts new procedures designed to make trading less expensive for investors.

"Trading is a zero sum game," said Samuel Hayes, a professor at Harvard Business School. "The winners are the investors. The losers are the vendors."

The vendors here are specialists and market makers, the middlemen who profit from the difference or "spread" between the price at which stocks are bought and sold. Since the 18th century, stocks traditionally traded in increments of eighths of a dollar, meaning there's 12.5 cents between the best-priced bid for stock and the lowest offer to sell. That convention is endangered. Wednesday, the American Stock Exchange started trading in increments of sixteenths of a dollar, or 6.25 cents. Meanwhile, representatives of all the nation's major stock exchanges will meet next week to consider a computer upgrade to allow minimum stock quotes as fine as one sixty-fourth of a dollar, or 1.6 cents. Academics, regulators, and exchange officials expect spreads to narrow, to the benefit of institutional and individual investors. "Savings (for investors) could be as much as $3 billion," said Junius Peake, a professor of finance at the University of Northern Colorado. Peake estimates that investors may save an average of 1 cent on every share that's traded. About 264 billion shares traded in 1996. These changes come as the Securities and Exchange Commission and Congress apply pressure on Wall Street to narrow spreads. The House of Representatives is considering a bill requiring U.S. markets to move to decimal pricing, with penny increments. Using smaller fractions blunts criticism that stocks should trade in decimals and is quicker because exchanges can adopt new pricing procedures with fewer computer changes. Markets outside the U.S. trade in decimals. Bernard L. Madoff Investment Securities accelerated the shift last week, when it said it would begin posting prices for New York Stock Exchange-listed stocks in increments of one-sixteenth. Madoff is the largest arranger of trades for brokerage firms outside traditional exchanges, handling 10 percent of the transactions in NYSE stocks. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.