Commission Order and Notice:
Order Staying the Deadlines for Decimal Implementation; Notice Requesting Comment on Revised Decimal Implementation Schedules
Securities and Exchange Commission
Release No. 34-42685/April 13, 2000
File No. 4-430
Order Staying the Deadlines for Decimal Implementation and Notice of Request for Comment on Revised Decimal Implementation Schedules
On January 28, 2000, the Securities and Exchange Commission ("Commission") issued an order (the "Decimals Order")1 requiring the American Stock Exchange LLC ("AMEX"), the Boston Stock Exchange, Inc. ("BSE"), the Chicago Board Options Exchange, Inc. ("CBOE"), the Chicago Stock Exchange, Inc. ("CHX"), the Cincinnati Stock Exchange, Inc. ("CSE"), the National Association of Securities Dealers, Inc. ("NASD"), the New York Stock Exchange, Inc. ("NYSE"), the Pacific Exchange, Inc. ("PCX"), and the Philadelphia Stock Exchange, Inc. ("PHLX") (collectively the "Participants")2 to facilitate an orderly transition to decimal pricing in the United States securities markets. The Decimals Order prescribed a timetable for the Participants to begin trading some equity securities (and options on those equity securities) in decimals by July 3, 2000, and all equities and options by January 3, 2001.
On March 6, 2000, despite previous assurances of readiness, the NASD announced that The Nasdaq Stock Market Inc. ("Nasdaq") would not have sufficient capacity to meet the target dates for implementation.3 The NASD also expressed concerns regarding overall industry readiness and requested that the Commission work with the industry and the markets to determine an appropriate time frame that would not impose unnecessary risks on investors.4
The Commission remains committed to implementing decimal pricing as expeditiously as possible. Decimal pricing could benefit investors by enhancing investor comprehension, facilitating globalization of our markets, and potentially reducing transaction costs. At the same time, however, the Commission believes that decimal pricing must be implemented in a manner that does not have a negative impact on the order routing, trading, and settlement systems of the markets and the securities industry, and that does not result in investor confusion. In light of the NASD's announcement that it is unable to meet the original planned implementation schedule for decimalization, and subsequent communications with the Participants, the industry, and others, the Commission hereby suspends the deadlines in the Decimals Order.5 The Commission also requests comment on two alternatives for initiating decimal trading in exchange-listed equity securities this year.
I. Alternative Schedules To Implement Decimal Pricing
Since the NASD's announcement, the Commission, Participants, and other members of the securities industry have continued to discuss industry readiness and the feasibility and advisability of proceeding with the timetable set forth in the Decimals Order and the Extension Order without, or with the limited participation of, Nasdaq.6 Based on these discussions, it appears that decimal pricing in at least some exchange-listed securities may be feasible this year. Specifically, the securities exchanges have indicated that their individual systems are prepared to convert to decimal pricing by July 3, 2000.7 The NASD has also asserted that Nasdaq has sufficient capacity to implement decimal pricing for exchange-listed securities (i.e., the third market) by September 4, 2000,8 with full implementation of decimal pricing by March 31, 2001.9 Two electronic communications networks stated that they are prepared for decimals, and that trading exchange-listed securities in decimals should not be delayed because of Nasdaq's inability to meet the July 3rd target date.10
The vast majority of the Participants and securities firms, however, believe that it would not be advisable to implement widespread trading of exchange-listed securities in decimals while trading of Nasdaq securities remains in fractions, due to concerns about investor confusion and systems implications.11
On April 6, 2000, Chairman Levitt received a letter from Congressmen Thomas Bliley, Michael Oxley, and Edward Markey, urging the Commission to order the markets to begin decimal pricing in all exchange-listed securities by September 4, 2000,12 even though Nasdaq securities would continue to be quoted in fractions.
In response to the changed circumstances resulting from the NASD's announcement, the Commerce Committee Letter, and industry comments, the Commission is soliciting public comment on two alternative proposals. First, the Commission requests comment on beginning trading in all exchange-listed securities in decimals (in nickel or penny increments) by September 4, 2000. Second, if commenters believe that this implementation date for full decimalization of exchange-listed securities is not feasible, the Commission requests comment on phasing in decimal pricing in certain exchange-listed securities on a pilot basis ("Decimals Pilot"). The Decimals Pilot could begin by September 4, 2000, and would initially include a small number of exchange-listed securities, and options on those securities, selected by the Participants. The selected exchange-listed securities could be quoted in increments of a penny. The Decimals Pilot would expand to all listed stocks on March 31, 2001, at which time all exchange-listed securities and options on those securities would be traded in decimals. Nasdaq may add selected Nasdaq securities to the Decimals Pilot if it is feasible and would not delay Nasdaq's overall readiness for decimals. In any event, the Commission fully expects Nasdaq to be ready to initiate decimal pricing in Nasdaq securities by the termination of the Decimals Pilot on March 31, 2001.
II. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning both of the proposals discussed above. In particular, the Commission seeks comment on the following issues, particularly as they relate to the feasibility of simultaneously pricing exchange-listed securities in decimals and Nasdaq securities in fractions ("Dual Pricing"):
1.Is it feasible to begin Dual Pricing by September 4, 2000? If it is feasible, should trading in all exchange-listed securities be in nickel or penny increments? If it is not feasible to begin Dual Pricing by September 4, 2000, why not?
2.What, if any, systems changes or other steps would be necessary to implement Dual Pricing by this September 4, 2000 deadline? What type of changes would need to be made to the systems of securities firms, investment companies, and vendors? What would be the impact on systems capacity? In light of your answers to the foregoing questions, what changes would need to be made to the current decimals testing schedule?
3.Is the risk of customer confusion because of Dual Pricing significant, and if so, how should it be addressed?
4.If commenters believe that implementing Dual Pricing by September 4, 2000 is not feasible, what date(s) is(are) feasible to implement Dual Pricing? Commenters should include a discussion of the systems changes and testing schedules that would be needed for their alternative implementation date(s).
5.In addition, if commenters believe that implementing Dual Pricing by September 4, 2000 is not feasible, is the alternative Decimals Pilot proposal feasible or preferable? If commenters believe that the Decimals Pilot is feasible, what, if any, systems changes or other steps would be necessary to facilitate this schedule? In particular, what changes would need to be made to the current decimals testing schedule? What type of changes would need to be made to the systems of securities firms, investment companies, and vendors? What would be the impact on systems capacity? Is there a risk of customer confusion, and if so, how should it be addressed?
6.If commenters believe that the Decimals Pilot is not feasible, what alternative would expedite the implementation of decimal pricing in exchange-listed and Nasdaq securities? Commenters should include a discussion of the systems changes and testing schedules that would be needed for their alternative, including implementation date(s).
7.Commenters are requested to offer specific views on the optimal schedule for implementing decimal pricing in options based on exchange-listed and Nasdaq stocks subject to decimal pricing.
Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Comments also may be submitted electronically at the following E-mail address: firstname.lastname@example.org. All submissions should refer to File No. 4-430 and should be submitted by [insert date 21 days from date of publication]. Comment letters received will be available for public inspection and copying in the Commission's Public Reference Room. Electronically submitted comment letters will be posted on the Commission's Internet web site (http://www.sec.gov).
Because Nasdaq is unable to meet the implementation schedules set forth in the Decimals Order and the Commission is seeking comments on alternative proposals for implementing decimal pricing, the Commission believes that it is in the public interest in maintaining fair and orderly markets and to protect investors to suspend the deadlines in the Decimal Order and the Extension Order.
Accordingly, it is hereby ordered that all deadlines in the Decimals Order and the Extension Order be suspended. After reviewing any comments received, the Commission intends to issue an order for the implementation of decimal pricing.
It is hereby further ordered that the Participants continue to discuss the implementation of decimal pricing collectively and with interested market participants, and work together and with others in developing an implementation plan in anticipation of decimal pricing. The Decimals Order directed the Participants to act jointly in discussing a plan to implement decimal pricing in the equities and options markets, and to discuss that plan with other interested market participants. While this order suspends all deadlines in the Decimals Order, the Order otherwise remains in effect.
By the Commission.
Jonathan G. Katz
1See Securities Exchange Act Release No. 42360 (Jan. 28, 2000), 65 FR 5004 (Feb. 2, 2000) ("Decimals Order").
2Since the date of the Decimals Order, the Commission approved the registration of the International Securities Exchange ("ISE") as a national securities exchange. See Securities Exchange Act Release No. 42455 (Feb. 24, 2000), 65 FR 11388 (March 2, 2000). On March 10, 2000, the Commission included the ISE within the term "Participants" for purposes of the Decimals Order. See Securities Exchange Act Release No. 42516 (March 10, 2000), 65 FR 14637 (March 17, 2000) ("Extension Order").
3See Letters from Frank G. Zarb, Chairman and Chief Executive Officer, NASD, to Arthur Levitt, Chairman, Commission, dated March 6, 2000 and March 21, 2000.
4Nasdaq has committed to stepping up its efforts (including, at the Commission's request, hiring an independent consultant to advise on capacity issues) to help ensure that it manages its growth responsibly. The Commission expects, and has been assured, that Nasdaq will dedicate substantial resources and the attention of senior management to the conversion to decimal pricing. The Commission is monitoring Nasdaq's efforts closely.
5The two earliest deadlines set by the Decimals Order required the Participants to submit jointly by March 13, 2000 a decimals implementation plan, and each Participant to submit by March 28, 2000 proposed rule changes necessary to implement the decimals implementation plan. These deadlines were extended (to April 14, 2000 and April 28, 2000, respectively) as a result of the NASD announcing that it would be unable to begin implementing decimal pricing on July 3, 2000. See Extension Order, supra note 2.
6For example, Chairman Levitt recently wrote to each Participant asking for their views regarding, in part, the feasibility and advisability of trading simultaneously exchange-listed securities in decimals and Nasdaq securities in fractions. See Letter from Arthur Levitt, Chairman, Commission, to Participants, dated March 10, 2000.
7See Letters to Arthur Levitt, Chairman, Commission, from Richard A. Grasso, Chairman and Chief Executive Officer, NYSE, dated March 22, 2000; Philip D. DeFeo, Chairman and Chief Executive Officer, PCX, dated March 21, 2000; Charles J. Henry, President and Chief Operating Officer, CBOE, dated March 21, 2000; David Krell, President and Chief Executive Officer, ISE, dated March 21, 2000; William G. Morton, Jr., Chairman and Chief Executive Officer, BSE, dated March 21, 2000; Salvatore F. Sodano, Chairman and Chief Executive Officer, AMEX, dated March 21, 2000; Robert H. Forney, President and Chief Executive Officer, CHX, dated March 20, 2000; Meyer S. Frucher, Chairman and Chief Executive Officer, PHLX dated March 20, 2000; and David Colker, President and Chief Operating Officer, CSE, dated March 17, 2000 ("March 2000 Letters to Arthur Levitt").
8See Letter from Richard Ketchum, President, NASD, to Annette Nazareth, Director, Division of Market Regulation ("Division"), Commission, and Robert L.D. Colby, Deputy Director, Division, Commission, dated April 12, 2000.
10See Letter from Douglas Atkin, President and Chief Executive Officer, Instinet Corporation, to Annette Nazareth, Director, Division, Commission, dated March 21, 2000; see also Letter from Cameron Smith, General Counsel, Island ECN, to Annette Nazareth, Director, Division, Commission, dated April 10, 2000.
11The Participants also noted that systems and application software would have to be modified to handle a mix of decimal and fractional prices for a large number of securities over an extended period of time. See March 2000 Letters to Arthur Levitt, supra note 7. Order receiving, routing and processing systems at brokerage firms and service bureaus would have to create and maintain a table containing price formats for each security to perform price format checking. Id. The Participants and securities firms were generally concerned that bifurcating the markets without systems changes and testing could increase error and corresponding rejection rates. Id.
12See Letter from Chairman Thomas Bliley, Committee on Commerce, U.S. House of Representatives; Chairman Michael G. Oxley, Subcommittee on Finance and Hazardous Materials, U.S. House of Representatives; and Congressman Edward J. Markey, Ranking Member, Subcommittee on Telecommunications, Trade, and Consumer Protection, U.S. House of Representatives; to Arthur Levitt, Chairman, Commission, dated April 4, 2000 ("Commerce Committee Letter").