While the Commission is not mandating the details of a Decimals Implementation Plan, the plan must provide that decimal pricing of at least some equities (and options on those equities) trading on the Participants' markets will begin no later than July 3, 2000, and decimal pricing of all equities and options on the Participants' markets will be completed within six months of that date.29 If the Participants adopt a phase-in plan for implementing decimal pricing, rather than pricing all equities and options on the Participants' markets in decimals on July 3, 2000, the plan must provide specific dates by which each phase will be completed and identify which securities will be priced in decimals during each phase. The Decimals Implementation Plan may fix the minimum increment during the phase-in period, provided that the minimum increment is no greater than five cents for any equity priced in decimals. The Commission believes that it is appropriate for the Participants to establish a minimum increment during the phase-in period to allow the industry to make a smooth transition to decimal pricing and to determine the impact of decimal pricing on trading rules and inter-market systems capacity.30
The Commission also believes that the securities industry should study the impact of quoting and trading in increments smaller than a nickel on trading patterns and capacity. For example, there are concerns that OPRA may not have sufficient capacity to handle increased quote traffic resulting from the conversion to decimal pricing and other market changes.31 As a result, queuing and stale quotes may become an issue if quote traffic exceeds OPRA's capacity.32 Therefore, in the event that the Participants adopt a phase-in plan using a minimum increment greater than a penny, the Participants should also concurrently establish a pilot program that provides for selected securities (equities and options on those equities) to be traded in penny increments. The pilot should allow the Participants and the Commission to evaluate the effect of smaller trading increments on capacity and trading behavior. The pilot should run concurrently with the phase-in period and should be considered part of the Decimals Implementation Plan.
Thirty days after the end of the phase-in period, the Participants must submit (1) a study to the Commission regarding the impact of decimal pricing on trading and capacity, including the impact of the pilot program, and (2) a recommendation regarding the need for uniform minimum increments, if any. The recommendation should discuss whether one uniform minimum increment should be adopted or whether different minimum increments should be applied and the criteria by which the Participants would select securities to be traded in those various minimum increments. Thirty days after submitting their study and recommendation, and absent Commission action, the Participants individually must submit for notice, comment and Commission consideration proposed rule changes to implement their individual choice of minimum increments by which equities and options are quoted and traded on their respective markets.
It is hereby ordered, pursuant to Section 11A(a)(3)(B) of the Act,33 that the Participants act jointly in discussing, developing and submitting to the Commission a Decimals Implementation Plan, as described above. The Participants are ordered to submit to the Commission a Decimals Implementation Plan for the equity and options markets no later than 45 days after the issuance of this Order. In addition, each Participant is ordered to submit for notice, comment and Commission consideration the rule changes necessary to implement the Decimals Implementation Plan no later than 60 days after the issuance of this Order. 34 The Participants are also directed to submit a study and recommendation, as described in this Order, 30 days after the phase-in period. In addition, absent Commission action, 30 days following the submission of the study, each Participant must submit rule changes implementing their individual choice of minimum pricing increments for their respective markets for notice, comment and Commission consideration.
This Order will be effective until such time as the implementation of decimal pricing is completed.
By the Commission.
Jonathan G. Katz
1 Section 11A(a)(3)(B) authorizes the Commission, in furtherance of its statutory directive to facilitate the establishment of a national market system, by rule or order, "to authorize or require self-regulatory organizations to act jointly with respect to matters as to which they share authority under [the Act] in planning, developing, operating, or regulating a national market system (or a subsystem thereof) or one or more facilities thereof." 15 U.S.C. 78k-1(a)(3)(B).
2 The ISE has filed an application with the Commission to register as a national securities exchange. See Securities Exchange Act Release No. 41439 (May 24, 1999), 64 FR 29367 (June 1, 1999).
3 NSCC, a clearing agency registered with the Commission pursuant to Section 17A of the Act, clears and guarantees securities transactions and determines its members' net settlement obligations.
4 DTC, a clearing agency registered with the Commission pursuant to Section 17A of the Act, is the depository for more than 90% of the securities held in the United States.
5 OCC, a clearing agency registered with the Commission pursuant to Section 17A of the Act, issues and clears transactions in options on equities, currencies, indexes, and financial instruments, records participants' positions, and determines participants' daily options net settlement obligations.
6 SIAC is a registered exclusive securities information processor and is owned by the AMEX and the NYSE. See Securities Exchange Act Release No. 12035 (Jan. 22, 1976), 41 FR 4372 (Jan. 29, 1976).
7 The ITSOC consists of representatives from each Participant and is responsible for implementing the terms of the ITS plan.
8 OPRA is an association governed by a committee consisting of representatives of the four national securities exchanges authorized by the Commission to list options for trading (the AMEX, the CBOE, the PCX, and the PHLX) and of the NYSE (which no longer lists options for trading). In 1976, OPRA registered as a securities information processor. See Securities Exchange Act Release No. 12035 (Jan. 22, 1976), 41 FR 4372 (Jan. 29, 1976). OPRA was formed and operates pursuant to a plan approved by the Commission on March 18, 1981, as amended. See Securities Exchange Act Release No. 17638, as amended. See, e.g., Securities Exchange Act Release No. 40767 (Dec. 9, 1998), 63 FR 69354 (Dec. 16, 1998).
9 The CTA governs the consolidated transaction reporting system. It consists of representatives from each Participant.
10 The CQOC oversees the development and implementation of a consolidated data stream for quotation information. See Securities Exchange Act Release No. 15009 (July 28, 1978), 43 FR 34851 (Aug. 7, 1978). It is a committee consisting of representatives from each of the exchanges and the NASD.
11 Additional requirements are discussed at text accompanying note 34.
12 Testimony of Lois Kazakoff, Business News Editor, The San Francisco Chronicle, before the Subcommittee on Finance and Hazardous Materials, Committee on Commerce, U.S. House of Representatives on April 10, 1997.
13 Testimony of Steven M.H. Wallman, Commissioner, Commission, before the Subcommittee on Finance and Hazardous Materials, Committee on Commerce, U.S. House of Representatives on April 10, 1997 ("Wallman Testimony").
14 Division of Market Regulation ("Division"), Commission, Market 2000: An Examination of Current Equity Market Developments (Jan. 1994).
15 Congressman Oxley introduced the bill for himself and Congresspersons Markey, Bliley, Gillmor, Crapo, Furse, Largent, Ganske, and Boucher.
16 H.R. 1053, 105th Cong., 1st Sess. (1997) (commonly referred to as the "Common Cents Stock Pricing Act of 1997").
17 See Floyd Norris, So Long, Fractions, But Maybe Not Till 2000, N.Y. Times, June 6, 1997, at D1.
18 See Letter from Arthur Levitt, Chairman, Commission, to the Honorable John D. Dingell and the Honorable Thomas J. Manton, U.S. House of Representatives, dated July 25, 1997. As the markets committed to move to decimal pricing, they took the interim step of quoting in narrower increments. See, e.g., Securities Exchange Act Release Nos. 38571 (May 5, 1997), 62 FR 25682 (May 9, 1997) (permitting all AMEX equity securities selling at or above $.25 to trade in sixteenths); 38744 (June 18, 1997), 62 FR 34334 (June 25, 1997) (order approving proposal to quote in sixteenths on the NYSE); 38779 (June 26, 1997), 62 FR 36328 (July 7, 1997) (order approving proposal to quote in sixteenths on the PHLX); and 38678 (May 27, 1997), 62 FR 30363 (June 3, 1997) (changing the minimum quotation increment for certain Nasdaq securities to sixteenths).
19 Testimony of Thomas J. McCool, Director, Financial Institutions and Markets Issues, GAO, before the Subcommittee on Finance and Hazardous Materials, Committee on Commerce, U.S. House of Representatives on May 8, 1998. The GAO also recommended that the Commission, in directing the securities industry's move to decimal pricing, assess: (1) the potential impact of decimal trading on the industry's processing and communication capacity; and (2) the impact on market regulations and exchange rules.
20 While confirming the importance of moving to decimals expeditiously, he stated that "the industry's technological priority must be to prepare for Year 2000 readiness." See letter from Arthur Levitt, Chairman, Commission, to the Honorable Ted Stevens and the Honorable Fred Thompson, U.S. Senate, and to the Honorable Dan Burton and the Honorable Bob Livingston, U.S. House of Representatives, dated July 20, 1998.
22 See letter from Richard R. Lindsey, Director, Division, Commission, to the Participants, dated August 25, 1998.
23 See, e.g., letters from George W. Mann, Jr., Senior Vice President and General Counsel, BSE, to Richard R. Lindsey, Director, Division, Commission, dated September 24, 1998 (citing, in part, the need for possible amendments to the Intermarket Trading System Plan and exchange surveillance procedures); and Charles J. Henry, President and Chief Operating Officer, CBOE, to Richard R. Lindsey, Director, Division, Commission, dated September 16, 1998 (identifying, in part, the following rules that would have to be amended or reconsidered as a result of decimals: Retail Automatic Execution System operations, crossing orders, and priority rules). In light of the potential impact of decimal pricing on the industry's processing and communication capacity, the SIA commissioned SRI Consulting to assess the impact on message traffic of trading equities and options in decimals. The study projected that in the listed equities markets, a nickel minimum price variation could increase daily quote volume by 3.5 percent, while a penny minimum price variation could increase quote volume by 139 percent. In addition, SRI projects that, by the end of 2001, options message traffic may increase by as much as 257 percent as a result of decimal pricing.
24 By letter dated October 14, 1999, the AMEX, CBOE, NASD, PCX and PHLX asked the Commission to authorize expressly joint discussions and action by the exchanges regarding decimal pricing. See letter from Colleen P. Mahoney to Harvey J. Goldschmid, General Counsel, Commission, dated October 14, 1999.
25 15 U.S.C. 78k-1(a)(2).
26 15 U.S.C. 78k-1(a)(3)(B).
27 See, e.g., Securities Exchange Act Release No. 41843 (Sept. 7, 1999), 64 FR 50126 (Sept. 15, 1999) (order directing options exchanges to develop strategies to mitigate quote message traffic); and Securities Exchange Act Release No. 42029 (Oct. 19, 1999), 64 FR 57674 (Oct. 26, 1999) (order directing options exchanges to submit an inter-market linkage plan).
28 As discussed above, the U.S. securities markets are the only major markets not using decimals. See Wallman Testimony, supra note 13.
29 The Commission is not mandating that the phase-in period last six months. Instead, six months is the maximum time period for phasing in decimal pricing. After considering options capacity studies and after discussions with the industry, the Commission believes that six months provides adequate time for the Participants to make an orderly transition to decimal pricing while responding to changes in the markets that could result from the conversion from fractions to decimals.
30 See supra note 23.
31 See SIAC/SRI Consulting, Mitigating Options Message Traffic Final Report (Dec. 14, 1999).
32 Id. at 1.
33 15 U.S.C. 78k-1(a)(3)(B).
34 Although Commission staff may be consulted in discussing the proposed Decimals Implementation Plan, staff presence at joint discussions is not required by this Order. In issuing this Order, the Commission does not address: (a) any joint or other conduct that occurred prior to the issuance of this Order, and (b) any joint or other conduct occurring after the date of this Order that is not ordered or requested by this Order.