NASD Asks SEC To Delay Move To Decimalization; SIA Releases Survey

WASHINGTON, DC--The National Association of Securities Dealers (NASD) has asked the Securities and Exchange Commission (SEC) to consider delaying the implementation of decimalization until 2001.

The letter, which was sent to SEC chairman Arthur Levitt by NASD chairman and CEO Frank Zarb, underlines the NASD’s support for the project but warns the commission against moving too fast. "The prudent thing to do is implement decimals when we know we are ready. We are not there yet. Nasdaq has been growing faster than other markets, so it is logical that we are more sensitive to capacity issues. We will not put investors and the market at risk by forging ahead too soon. It is important that we do this right," Zarb states.

The recommendation comes amid growing concerns that securities firms won’t have enough time to be prepared for the sharp increase in data traffic by the July 3 deadline. In fact, decimalization is currently the primary focus of market data managers in North America and some industry observers say additional requests will be filed if the SEC turns down the NASD’s proposal.

Meanwhile, the Securities Industry Association (SIA), aided by TowerGroup, recently revealed the results of its survey of some 760 North American securities broker/dealers on all aspects of the move to decimal pricing.

The survey focused on key decimalization spending aspects, including redemption of information technology, expansion of capacity, systems testing, industry wide testing and implementation issues.

The results: North American brokerage firms will have spent approximately $907 million to implement decimal pricing in the US equity and option markets between October 1999 and the final completion date. This figure is a fraction of what securities firms are estimated to have spent for Y2K remediation ($6.07 billion) and is only $43 million below the $950 million companies are thought to have spent to facilitate the European Monetary Union.

The survey also found that securities firms will allocate the bulk of their expenditures to increasing their trading capacity.

Larger securities firms have accounted for approximately 75 percent of IT expenditures industry-wide. These firms are projected to spend disproportionately less on decimalization spending than on general technology. This is because they have recently made large investments to upgrade their technology infrastructures, increase capacity and enhance their straight through processing capabilities to expand their online distribution initiatives. Medium-sized firms, which have traditionally been slower to adopt new technologies, now have to catch up with the large firms.

Smaller firms, however, may not be as unduly burdened by the move to decimal pricing as larger firms, because their technology efforts will be supported by the corresponding clearing firms or their technology firms.

The survey also noted the impact of option trading and pricing on decimalization. Electronic pricing and multiple listings are two major drivers of this complexity. The increase in the number of market entry points magnifies the number of options quotes, as these prices are automatically generated for each price movement of the underlying stock.

The survey concludes that decimalization will force the industry to quote, trade and execute a rapidly expanding number of spreads that are smaller, lower-commission and narrower. Brokerage firms will need to adapt to this changed environment or be left behind.

Now that Y2K is behind the industry and more tangible volume estimates have been created, decimalization is looking much more extensive and expensive.