I've been talking to the traders around the office and it sounds like their profits dropped dramatically after the market went to pennies. So going to nickels definitely helps the specialists and those of us who trade the same stocks day in and day out ("surrogate specialists"). It definitely won't hurt us.
Review of Decimals by SEC
- Thread starter Speculator1929
- Start date
Here is a partial quote of a NYT article on the topic
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Will Wall Street Roll Back Decimalization?
RARELY has a change on Wall Street been more important in making life better for retail investors than the change to decimal pricing in stocks. Now it is under attack.
"I suspect the liquidity that used to exist has been severely dampened," William H. Donaldson, the chairman of the Securities and Exchange Commission, told CNBC this week. Yesterday, Mr. Donaldson told me that he believed "we have sufficient experience now with decimal trading to begin to analyze the effect of penny pricing on fair and orderly markets."
Many on Wall Street would love to see the commission act. Richard A. Grasso, the chairman of the New York Stock Exchange, suggested yesterday that the S.E.C should order an experiment in which some stocks be required to trade with prices moving in nickel increments, rather than the current penny.
Broadly speaking, the bigger the spread, the happier Wall Street is. In the old days, brokers prospered from minimum spreads of 12.5 cents, or an eighth of a dollar. In 1997, that was cut in half, and in 2000 and 2001 decimalization came in.
There is no question that individual investors who trade in lots of 100 or 200 shares have benefited from the narrower spreads. But there is evidence that institutional investors have suffered. Big trades of thousands of shares are more likely to exceed the number of shares offered at the best bid or ask price, forcing the buyer to pay more. "What you have done," Mr. Grasso said, "is collapsed spreads but made the depth of the market far more shallow."
A new study shows how that is working. Two scholars, Nicolas P. B. Bollen of Vanderbilt and Jeffrey A. Busse of Emory, estimated trading costs for mutual funds before and after decimalization. Their conclusion is that actively managed mutual funds are incurring greater transaction costs, and that those costs could be reducing annual returns by one percentage point.
That study did not try to differentiate among different types of actively managed mutual funds, but Mr. Bollen said yesterday he thought that the effect was greater on momentum funds and less on value funds that may be more patient in their trading.
But it may be that decimalization will turn out to be like other major market changes of the past, ranging from the introduction of block trading in the 1960's to program trading in the 1980's. At first those not accustomed to the new rules screamed that markets had been severely damaged. But in time traders learned to deal with the new conditions.
Indeed, the study by Mr. Bollen and Mr. Busse indicates that the negative effect of decimals declined a bit as traders adjusted.
Next week, the Big Board will introduce its "liquidity quote" in a test involving the 28 Dow Jones industrial average stocks traded on the exchange. The published quotes for those stocks will show not only the narrow spread for small orders but how much wider the spread is for large block trades. That additional information could help institutions lower their transaction costs.
If Mr. Donaldson wants to study the effect of decimals, he certainly can do so. But action should be delayed until it is clear the market has been unable to adapt, and that may take years.
He should remember that his predecessors at the S.E.C. spent years trying to figure out how to regulate the odious practice of payment for order flow, in which market makers paid brokers for the right to execute a customer's trade. Then decimalization, and the competition in spreads it brought, largely ended the practice.
Price competition is usually good for the customers. Proving that that is not the case in stocks will be difficult, at best.
____________________________________
Will Wall Street Roll Back Decimalization?
RARELY has a change on Wall Street been more important in making life better for retail investors than the change to decimal pricing in stocks. Now it is under attack.
"I suspect the liquidity that used to exist has been severely dampened," William H. Donaldson, the chairman of the Securities and Exchange Commission, told CNBC this week. Yesterday, Mr. Donaldson told me that he believed "we have sufficient experience now with decimal trading to begin to analyze the effect of penny pricing on fair and orderly markets."
Many on Wall Street would love to see the commission act. Richard A. Grasso, the chairman of the New York Stock Exchange, suggested yesterday that the S.E.C should order an experiment in which some stocks be required to trade with prices moving in nickel increments, rather than the current penny.
Broadly speaking, the bigger the spread, the happier Wall Street is. In the old days, brokers prospered from minimum spreads of 12.5 cents, or an eighth of a dollar. In 1997, that was cut in half, and in 2000 and 2001 decimalization came in.
There is no question that individual investors who trade in lots of 100 or 200 shares have benefited from the narrower spreads. But there is evidence that institutional investors have suffered. Big trades of thousands of shares are more likely to exceed the number of shares offered at the best bid or ask price, forcing the buyer to pay more. "What you have done," Mr. Grasso said, "is collapsed spreads but made the depth of the market far more shallow."
A new study shows how that is working. Two scholars, Nicolas P. B. Bollen of Vanderbilt and Jeffrey A. Busse of Emory, estimated trading costs for mutual funds before and after decimalization. Their conclusion is that actively managed mutual funds are incurring greater transaction costs, and that those costs could be reducing annual returns by one percentage point.
That study did not try to differentiate among different types of actively managed mutual funds, but Mr. Bollen said yesterday he thought that the effect was greater on momentum funds and less on value funds that may be more patient in their trading.
But it may be that decimalization will turn out to be like other major market changes of the past, ranging from the introduction of block trading in the 1960's to program trading in the 1980's. At first those not accustomed to the new rules screamed that markets had been severely damaged. But in time traders learned to deal with the new conditions.
Indeed, the study by Mr. Bollen and Mr. Busse indicates that the negative effect of decimals declined a bit as traders adjusted.
Next week, the Big Board will introduce its "liquidity quote" in a test involving the 28 Dow Jones industrial average stocks traded on the exchange. The published quotes for those stocks will show not only the narrow spread for small orders but how much wider the spread is for large block trades. That additional information could help institutions lower their transaction costs.
If Mr. Donaldson wants to study the effect of decimals, he certainly can do so. But action should be delayed until it is clear the market has been unable to adapt, and that may take years.
He should remember that his predecessors at the S.E.C. spent years trying to figure out how to regulate the odious practice of payment for order flow, in which market makers paid brokers for the right to execute a customer's trade. Then decimalization, and the competition in spreads it brought, largely ended the practice.
Price competition is usually good for the customers. Proving that that is not the case in stocks will be difficult, at best.
"There is no question that individual investors who trade in lots of 100 or 200 shares have benefited from the narrower spreads. But there is evidence that institutional investors have suffered. Big trades of thousands of shares are more likely to exceed the number of shares offered at the best bid or ask price, forcing the buyer to pay more. "What you have done," Mr. Grasso said, "is collapsed spreads but made the depth of the market far more shallow." "
this statement is absolutely true. If you want to buy 100 shares with a limit order you still can, but the amount of trading volume done in that fashion is MINISCULE.
I understand smaller spreads and increments have helped some people, but they have simply taken it to an illogical extreme that doesn't really help anybody.
this statement is absolutely true. If you want to buy 100 shares with a limit order you still can, but the amount of trading volume done in that fashion is MINISCULE.
I understand smaller spreads and increments have helped some people, but they have simply taken it to an illogical extreme that doesn't really help anybody.
I suspect the ideal increment is either 1, 2, or 5 cents depending on the price of the stock and how many shares it trades.
Low priced stocks that are also very liquid could trade single pennies no problem, higher priced stocks with less volume should probably trade nickels to improve liquidity at each price point.
Low priced stocks that are also very liquid could trade single pennies no problem, higher priced stocks with less volume should probably trade nickels to improve liquidity at each price point.
I just don't see what the issue is here. It is obvious that spec's, MM's and scalpers are hurt by pennies. Everyone else is helped. The only way it could possibly affect liquidity is if daytraders are dropping out in droves because of it, or if spec's are not fulfilling their responsibility to amke a market. No doubt there are less daytraders, but I think this is only one reason. And I really doubt the NYSE is acting out of a concern for daytraders.
The spec's clearly donot want to make a market with penny spreads. Hey, they used to get 1/8 so this is so unfair. But has the liquidity available at 1/8 or 1/4 changed all that much? It doesn't seem so to me, but I don't really have any way of knowing.
The article about the academic study omitted important factors, namely who paid for the study and did the authors have anyaffiliation with the exchange? Its conclusions fly in the face of common sense. Of course a big order will not get totally filled at the market, but the relevant question is will it get filled at a worse price than if the spreads were $.05 or .10? I see no reason it should. If the exhange is actually claiming differently, then that is a damning criticism of the specialist system.
The spec's clearly donot want to make a market with penny spreads. Hey, they used to get 1/8 so this is so unfair. But has the liquidity available at 1/8 or 1/4 changed all that much? It doesn't seem so to me, but I don't really have any way of knowing.
The article about the academic study omitted important factors, namely who paid for the study and did the authors have anyaffiliation with the exchange? Its conclusions fly in the face of common sense. Of course a big order will not get totally filled at the market, but the relevant question is will it get filled at a worse price than if the spreads were $.05 or .10? I see no reason it should. If the exhange is actually claiming differently, then that is a damning criticism of the specialist system.
Its funny how the NYSE which presents itself as the bastion of unfettered capitalism squeals for the protection of government regulation over the free market concept of letting decimalization determine the proper spread size for stocks.
While this raw capitalism may be uncomfortable for NYSE specialists now â it doesnât even begin to make up for the artificially wide spreads that the public had to pay while the exchange did everything it could to delay decimalization.
I recall talking to the President of the NYSE at a seminar about 10 years ago and asking him when they were going to switch to decimals. He turned red and almost choked at the thought. He said something about âcomputersâ¦.canât handle itâ and then walked away.
While this raw capitalism may be uncomfortable for NYSE specialists now â it doesnât even begin to make up for the artificially wide spreads that the public had to pay while the exchange did everything it could to delay decimalization.
I recall talking to the President of the NYSE at a seminar about 10 years ago and asking him when they were going to switch to decimals. He turned red and almost choked at the thought. He said something about âcomputersâ¦.canât handle itâ and then walked away.