Conference Call: Decimals cut spread between bid, ask prices

The number of shares offered within quoted bid and ask prices on the New York Stock Exchange has plunged 70% for 63 stocks that are part of a pilot program to conduct trades in pennies.

That was one of the findings of a report by the NYSE given to the Securities and Exchange Commission last month, which held a round table on decimalization.

For America Online Inc. and Compaq Computer Corp., the two largest stocks that have been traded in dollars and cents since the pilot program started being phased in last August, the reduction in depth has been even greater — 77% and 80%, respectively, said Jeffrey Bacidore, NYSE director of research.

Trading all stocks in decimals is set to take place on the NYSE and the Nasdaq markets early this year.

That fewer shares are offered within quoted bid and ask prices “isn’t really surprising,” Mr. Bacidore said. “You have to keep in mind that those quotes are much tighter than they were before.”

The spread between prices bid and offered for stocks on the exchange has dropped 19%, falling to 10 cents, from about 12 cents on average, Mr. Bacidore said.

Mr. Bacidore said the NYSE would next look at overall market liquidity, including quoted prices as well as limit orders.

But the number of executed orders that resulted from limit orders also has dropped for stocks that are being traded in decimals, Mr. Bacidore revealed.

“Of the executed system volume, a much smaller percent is coming from limit orders,” he said.

It was 74% of executed volume before decimalization; it has now fallen to 67%. For America Online and Compaq, the percentage dropped to 63%, from 74%.

“We do see changes in order-submission strategies — in particular, limit-order-submission strategies,” he said.

The SEC last year tried to encourage investors to use limit orders more than market orders to prevent investors from getting stuck paying stock prices that could skyrocket in quickly moving markets.

The study also found:

* The average time between quoted price changes dropped 40%, indicating greater price volatility. For America Online and Compaq, it dropped about 60%.

Before decimals, a given bid price stayed in effect for about 96 seconds. Now, it holds for just 41 seconds. “Prices do move around more following decimalization,” Mr. Bacidore said.

* Before decimals, about 13% of all trading volume had been done through an NYSE specialist.

Following decimals, that rose to 16%. America Online and Compaq originally had 12% specialist participation; that rose to 16% after trading in decimals began.

* Order sizes declined 18% for all 63 stocks traded in pennies and about 27% for Compaq and America Online. “We do see changes in the size of the orders going through our system electronically after decimals,” Mr. Bacidore said.

* Before decimals, about 31% of orders were executed within the national best bid and offer, and 5% were executed outside that range, resulting in average savings of 5 cents a share. Following decimalization, 62% of orders were executed inside of the quoted ranges.

“That makes sense because before, to execute inside the quote, you had to get a better price of at least 61/4 cents. You go to penny trading, that will be smaller,” he said.

With decimalization, investors have saved on average 3 cents a share from quoted prices.

Annette Nazareth, director of the SEC’s division of market regulation, said she was surprised at the data on the number of stock prices within the best-bid-and-offer quote.

“That seemed a little counterintuitive to me,” she said. “If the spreads have narrowed, why aren’t we seeing much more price improvement … I wondered when I looked at it, did that mean that the specialists were stepping ahead” of other investors in trading stocks?

Mr. Bacidore replied that use of specialists “hasn’t skyrocketed by any means.” When price spreads are tightened, “you could see less execution inside the quote,” he said.

Robert Fagenson, vice chairman of Van der Moolen Specialists USA, a trading company in New York owned by Dutch-based Van der Moolen, said that large trades are now being split up more frequently.

“The average two- or three-thousand-share order may be getting two or three prices, whereas heretofore it might have gotten one,” he said.