June 18, 2000
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: SEC Request for Comment on Revised Decimalization Implementation Schedule - File No. 4-430
Dear Mr. Katz:
I write in my capacity as Chair of the Decimalization Subcommittee ("Subcommittee") of Nasdaq's Institutional Trader's Advisory Council ("ITAC")1 to offer the ITAC's views in response to the Securities and Exchange Commission's ("SEC" or "Commission") recent request for comment on establishing a revised implementation schedule for decimal pricing in our nation's equity and options markets.
At the outset, the Subcommittee would like to express its full support of the Commission and the primary securities and options markets as they strive to accomplish the difficult and complex task of establishing decimal pricing. The Subcommittee concurs with the Commission's view that decimal pricing will lead to greater investor understanding of market prices and price movements as well as facilitate increased globalization of trading. Given the far-reaching impacts of decimalization, however, it is important that it be implemented in a manner that does not unduly disrupt current market functions.
In short, decimalization needs to be done right and must take into full account the realities of today's market environment. Chief among those realities is the dramatic increase in transaction, quotation and message volumes prevalent in electronic markets like Nasdaq. As members of ITAC, we, like Commission staff, were fully briefed by NASD/Nasdaq senior management on the unprecedented demands currently being placed on Nasdaq's systems and recognize that the NASD's determination to seek a delay in decimal pricing for Nasdaq, while not popular, was a responsible one. The Subcommittee is confident that the Commission will likewise act responsibly in arriving at a decimal implementation plan that is sensitive to concerns and resource constraints of all market participants.
The Commission has proposed two alternatives for scheduling the implementation of decimal pricing. First is a fully bifurcated approach in which all exchange-listed securities would be traded in decimal prices starting this Fall with Nasdaq securities continuing to trade in fractions until the Spring of 2001. The second would create a pilot program for a limited number of listed equities and options that would allow those pilot securities to trade in decimals starting in September. The actual quotation increment under either plan (5 cents or 1 cent) remains to decided. Of these alternatives, the Subcommittee believes that a limited pilot approach is preferable.
In the Subcommittee's view, a limited pilot will allow the industry to gain valuable experience in decimal-based trading without exposing the entire market to the unknown capacity and regulatory burdens associated with all listed securities trading in decimals. In addition, a small pilot should also decrease the likelihood for investor and market participant confusion that could occur with the widespread dissemination of mixed decimal and fractional prices in a full listed decimal implementation. To the extent that Nasdaq is capable, consistent with prudent capacity planning, of introducing a limited number of its securities into a decimals pilot, the Subcommittee would support that goal.
The Commission also sought comment on potential system changes required for dual fractional and decimal pricing. In general, the firms represented on the Subcommittee use in-house portfolio systems that already convert fractional amounts into decimal values and will not require major reprogramming to accommodate dual pricing. That being said, the Subcommittee recognizes that dual pricing may impose significant technology burdens on other market participants and we urge the Commission to solicit and review input from a broad base of securities firms in reaching a conclusion about industry-wide decimal preparedness.
Finally, the Subcommittee's support for a limited pilot is tempered by concerns regarding data vendor capacity readiness. We urge the Commission to take steps to ascertain the ability of vendors to process the expected increase in quotations anticipated from the advent of decimal pricing. Vendors play a vital role in the dissemination of market data and their capabilities in meeting the challenges of decimalization are key to ensuring that the transition to decimals is a smooth one.
On behalf of the ITAC, the Subcommittee would like to thank the Commission for the opportunity to comment on this important matter and we look forward to working with Nasdaq and the Commission towards the adoption of a reasonable and expeditious decimal implementation plan.
Hewlett Packard Benefits & Pension Investments
Chairman, ITAC Decimalization Subcommittee
1 ITAC represents 18 institutions with a combined total of over $2.5 trillion under management. Made up exclusively of buy-side traders, the ITAC advises The Nasdaq Stock Market and represents the buy side perspective on trading and market structure issues.