SEC Issues Concept Release on Effects of Subpenny Decimal Trading

Washington, DC, July 24, 2001 - The Securities and Exchange Commission has issued a concept release requesting comment on the impact of trading and potential quoting of securities in increments of less than a penny. Comments on the release are due to the SEC no later than September 24, 2001.

The release states that with the conversion to decimal pricing complete, the SEC believes it is now appropriate to request comment on the effect of subpenny trading on SEC and self-regulatory organization rules that are dependent on trading or quoting price differentials. In particular, the release requests comment on the effect of subpenny trading on market transparency, customer limit orders, various price-dependent rules, and automated systems.

Impact of Subpenny Trading on Transparency
The release discusses several aspects of market transparency that have been affected by the conversion to decimals. In particular, the release states that the ability of investors to understand the consolidated quotations of competing market centers may be adversely affected, and the accuracy of the quotations could be compromised, if the consolidated quotations used by investors do not fully reflect the subpenny orders available for execution at various price levels. Therefore, quotes may need to be displayed in subpennies. However, the release notes that if quotes were to be displayed in subpennies, investors and market participants might have to deal with confusing and rapidly changing quote montages which could result in "flickering" quotes in very small price increments. In addition, quoting in subpennies could have implications for market rules pertaining to locked and crossed markets and the ITS Plan's "trade-through" provisions.

The release also discusses the effect of the conversion to decimals on quotation depth. In particular, the release notes that as the minimum quoting increment has narrowed to a penny, the market depth at any particular price level has decreased as well. The release states that some firms and institutional investors have expressed concerns that the reduction in quoted market depth may be affecting adversely their ability to execute large orders and that smaller trading and quoting increments have increased the risk of displaying limit orders, particularly larger limit orders, leading to a reduction in the amount of liquidity provided by such orders.

In order to address these issues, the release requests comment on two mutually independent scenarios—the "rounding" and "inclusion" scenarios—under which subpenny trading might be accommodated.

Other Issues
The release discusses a variety of other issues, including:

• the effect of decimalization on the priority of orders in the securities markets;
• the effect of trading in subpennies on, among other things, customer limit order protection rules; and
• the SEC concern that a widespread transition to quoting, trading, or reporting of stocks in increments of less than a penny could result in systems issues that could compromise essential market and broker-dealer operations or disrupt the successful transition to decimals.