[Federal Register Volume 65, Number 22 (Wednesday, February 2, 2000)]
[Notices]
[Pages 5003-5006]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2286]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42360/January 28, 2000; File No. 4-430]


Order Directing the Exchanges and the National Association of 
Securities Dealers, Inc. To Submit a Decimalization Implementation Plan 
Pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934

    Notice is hereby given that, pursuant to Section 11A(a)(3)(B) of 
the Securities Exchange Act of 1934 (``Act''),\1\ the Securities and 
Exchange Commission (``Commission'') orders 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'' and individually a ``Participant'') 
to act jointly in discussing, developing, and submitting to the 
Commission a plan to implement decimal pricing in the equities and 
options markets beginning no later than July 3, 2000 (``Decimals 
Implementation Plan''), and in implementing the Decimals Implementation 
Plan. The Participants should discuss the development and 
implementation of the Decimals Implementation Plan with interested 
market participants, including, but not limited to, the Securities 
Industry Association (``SIA'') and its members, the International

[[Page 5004]]

Securities Exchange (``ISE''),\2\ the National Securities Clearing 
Corporation (``NSCC''),\3\ the Depository Trust Company (``DTC''),\4\ 
the Options Clearing Corporation (``OCC''),\5\ the Securities Industry 
Automation Corp. (``SIAC''),\6\ the Intermarket Trading System 
Operating Committee (``ITSOC''),\7\ the Options Price Reporting 
Authority (``OPRA''),\8\ the Consolidated Tape Association 
(``CTA''),\9\ and the Consolidated Quote Operating Committee (``CQOC'') 
(collectively the ``Interested Parties'').\10\ The Commission further 
directs the Participants to submit to the Commission a Decimals 
Implementation Plan no later than 45 days after the issuance of this 
Order. Finally, the Commission directs each Participant to submit for 
notice, comment and Commission consideration the rule changes necessary 
to implement the Decimals Implementation Plan no later than 60 days 
after the issuance of this Order.\11\
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    \1\ Section 11A(a)(3)(B) authorizes the Commission, in 
furtherance of its statutory directive to facilitate the 
establishment of a national market system, by rule or order, ``to 
authorize or require self-regulatory organizations to act jointly 
with respect to matters as to which they share authority under [the 
Act] in planning, developing, operating, or regulating a national 
market system (or a subsystem thereof) or one or more facilities 
thereof.'' 15 U.S.C. 78k-1(a)(3)(B).
    \2\ The ISE has filed an application with the Commission to 
register as a national securities exchange. See Securities Exchange 
Act Release No. 41439 (May 24, 1999), 64 FR 29367 (June 1, 1999).
    \3\ NSCC, a clearing agency registered with the Commission 
pursuant to Section 17A of the Act, clears and guarantees securities 
transactions and determines its members' net settlement obligations.
    \4\ DTC, a clearing agency registered with the Commission 
pursuant to Section 17A of the Act, is the depository for more than 
90% of the securities held in the United States.
    \5\ OCC, a clearing agency registered with the Commission 
pursuant to Section 17A of the Act, issues and clears transactions 
in options on equities, currencies, indexes, and financial 
instruments, records participants' positions, and determines 
participants' daily options net settlement obligations.
    \6\ SIAC is a registered exclusive securities information 
processor and is owned by the AMEX and the NYSE. See Securities 
Exchange Act Release No. 12035 (Jan. 22, 1976), 41 FR 4372 (Jan. 29, 
1976).
    \7\ The ITSOC consists of representatives from each Participant 
and is responsible for implementing the terms of the ITS plan
    \8\ OPRA is an association governed by a committee consisting of 
representatives of the four national securities exchanges authorized 
by the Commission to list options for trading (the AMEX, the CBOE, 
the PCX, and the PHLX) and of the NYSE (which no longer lists 
options for trading). In 1976, OPRA registered as a securities 
information processor. See Securities Exchange Act Release No. 12035 
(Jan. 22, 1976), 41 FR 4372 (Jan. 29, 1976). OPRA was formed and 
operates pursuant to a plan approved by the Commission on March 18, 
1981, as amended. See Securities Exchange Act Release No. 17638, as 
amended. See, e.g., Securities Exchange Act Release No. 40767 (Dec. 
9, 1998), 63 FR 69354 (Dec. 16, 1998).
    \9\ The CTA governs the consolidated transaction reporting 
system. It consists of representatives from each Participant.
    \10\ The CQOC oversees the development and implementation of a 
consolidated data stream for quotation information. See Securities 
Exchange Act Release No. 15009 (July 28, 1978), 43 FR 34851 (Aug. 7, 
1978). It is a committee consisting of representatives from each of 
the exchanges and the NASD.
    \11\ Additional requirements are discussed at text accompanying 
note 34.
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I. Background

    The current convention of quoting stock prices in fractions dates 
back more than two hundred years.\12\ The United States securities 
markets are the only major markets not to price securities in 
decimals.\13\ For the past few years, market participants and the 
Commission have discussed the possibility and usefulness of moving to 
decimal pricing. In January 1994, Commission staff recognized the 
potential benefits of decimal pricing over the current fraction-based 
pricing scheme and indicated that a move to decimals was likely to be 
inevitable.\14\ Throughout the mid and late 1990s, the Commission 
engaged the securities industry and the public in a discussion of the 
need for decimal pricing in the U.S. securities markets.
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    \12\ Testimony of Lois Kazakoff, Business News Editor, The San 
Francisco Chronicle, before the Subcommittee on Finance and 
Hazardous Materials, Committee on Commerce, U.S. House of 
Representatives on April 10, 1997.
    \13\ Testimony of Steven M.H. Wallman, Commissioner, Commission, 
before the Subcommittee on Finance and Hazardous Materials, 
Committee on Commerce, U.S. House of Representatives on April 10, 
1997 (``Wallman Testimony'').
    \14\ Division of Market Regulation (``Division''), Commission, 
Market 2000: An Examination of Current Equity Market Developments 
(Jan. 1994).
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    On March 13, 1997, this debate moved to the legislative arena when 
Congressman Oxley \15\ introduced a bill in the U.S. House of 
Representatives that would have directed the Commission to adopt a rule 
requiring quotations in dollars and cents for transactions in equity 
securities.\16\ Subsequently, the NYSE announced that it would 
implement decimal pricing by January 2000.\17\ Other markets soon 
followed suit.\18\ In light of this activity, the bill was not taken to 
full markup in the House Commerce Committee.
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    \15\ Congressman Oxley introduced the bill for himself and 
Congresspersons Markey, Bliley, Gillmor, Crapo, Furse, Largent, 
Ganske, Boucher
    \16\ H.R. 1053, 105th Cong. 1st Sess. (1997) (commonly referred 
to as the ``Common Cents Stock Pricing Act of 1997'').
    \17\ See Floyd Norris, So Long, Fractions, But Maybe Not Till 
2000, N.Y. Times, June 6, 1997, at D1.
    \18\ See Letter from Arthur Levitt, Chairman, Commission, to the 
Honorable John D. Dingell and the Honorable Thomas J. Manton, U.S. 
House of Representatives, dated July 25, 1997. As the markets 
committed to move to decimal pricing, they took the interim step of 
quoting in narrow increments. See e.g., Securities Exchange Act 
Release Nos. 38571 (May 5, 1997), 62 FR 25682 (May 9, 1997) 
(permitting all AMEX equity securities selling at or above $.25 to 
trade in sixteenths); 38744 (June 18, 1997), 62 FR 34334 (June 25, 
1997) (order approving proposal to quote in sixteenths on the NYSE); 
38779 (June 26, 1997), 62 FR 36328 (July 7, 1997), (order approving 
proposal to quote in sixteenths on the PHLX); and 38678 (May 27, 
1997), 62 FR 30363 (June 3, 1997) (changing the minimum quotation 
increment for certain Nasdaq securities to sixteenths).
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    On May 8, 1998, the General Accounting Office (``GAO'') determined 
that ``[e]nsuring that securities industry systems are ready for the 
Year 2000 is too important to the continued functioning of the industry 
to risk failure by attempting to implement decimal trading before the 
Year 2000 effort is completed.'' \19\ Chairman Levitt, in the 
Commission's response to the GAO report, concurred in this 
assessment.\20\ Chairman Levitt noted the importance, however, of 
setting a date certain by which the markets must move to decimal 
pricing. He noted that the industry should strive to implement decimal 
pricing by June 30, 2000.\21\ In light of what appears to be a 
successful resolution of the Year 2000 problem, the Commission believes 
that the industry's primary technological priority should be the 
implementation of decimal pricing.
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    \19\ Testimony of Thomas J. McCool, Director, Financial 
Institutions and Markets Issues, GAO, before the Subcommittee on 
Finance and Hazardous Materials, Committee on Commerce, U.S. House 
of Representatives on May 8, 1998. The GAO also recommended that the 
Commission, in directing the securities industry's move to decimal 
pricing, assess: (1) The potential impact of decimal trading on the 
industry's processing and communication capacity; and (2) the impact 
on market regulations and exchange rules.
    \20\ While confirming the importance of moving to decimals 
expeditiously, he stated that ``the industry's technological 
priority must be to prepare for Year 2000 readiness.'' See letter 
from Arthur Levitt, Chairman, Commission, to the Honorable Ted 
Stevens and the Honorable Fred Thompson, U.S. Senate, and to the 
Honorable Dan Burton and the Honorable Bob Livingston, U.S. House of 
Representatives, dated July 20, 1999.
    \21\ Id.
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    On August 25, 1998, Commission staff requested that the 
Participants provide information regarding the status of rule and 
systems changes that would need to be adopted to implement decimal 
pricing.\22\ The Participants' responses indicated that a range of 
rules and systems would require modification to accommodate decimal 
pricing.\23\

[[Page 5005]]

Because many of these rule and systems changes will have an impact on 
the securities industry as a whole, the Participants must develop a 
coordinated plan for converting to decimal pricing. To ensure a smooth 
conversion to decimal pricing, the Commission is therefore directing 
the Participants to develop a Decimals Implementation Plan and submit 
rule changes necessary to implement the plan to the Commission.\24\
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    \22\ See letter from Richard R. Lindsey, Director, Division, 
Commission, to the Participants, dated August 25, 1998.
    \23\ See e.g., letters from George W. Mann, Jr., Senior Vice 
President and General Counsel, BSE, to Richard R. Lindsey, Director, 
Division, Commission, dated September 24, 1998 (citing, in part, the 
need for possible amendments to the Intermarket Trading System Plan 
and exchange surveillance procedures); and Charles J. Henry, 
President and Chief Operating Officer, CBOE, to Richard R. Lindsey, 
Director, Division, Commission, dated September 16, 1998 
(identifying, in part, the following rules that would have to be 
amended or reconsidered as a result of decimals: Retail Automatic 
Execution System operations, crossing orders, and priority rules). 
In light of the potential impact of decimal pricing on the 
industry's processing and communication capacity, the SIA 
commissioned SRI Consulting to assess the impact on message traffic 
of trading equities and options in decimals. The study projected 
that in the listed equities markets, a nickel minimum price 
variation could increase daily quote volume by 3.5 percent, while a 
penny minimum price variation could increase quote volume by 139 
percent. In addition, SRI projects that, by the end of 2001, options 
message traffic may increase by as much as 257 percent as a result 
of decimal pricing.
    \24\ By letter dated October 14, 1999, the AMEX, CBOE, NASD, PCX 
and PHLX asked the Commission to authorize expressly joint 
discussions and action by the exchanges regarding decimal pricing. 
See letter from Colleen P. Mahoney to Harvey J. Goldschmid, General 
Counsel, Commission, dated October 14, 1999.
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II. Discussion

    Section 11A(a)(2) of the Act \25\ directs the Commission, having 
due regard for the public interest, the protection of investors, and 
the maintenance of fair and orderly markets, to use its authority under 
the Act to facilitate the establishment of a national market system for 
securities. Section 11A(a)(3)(B) gives the Commission the ability to 
authorize or require by order the self-regulatory organizations ``to 
act jointly * * * in planning, developing, operating, or regulating a 
national market system.'' \26\ This authority enables the Commission to 
require joint activity that otherwise might be asserted to have an 
impact on competition, where the activity serves the public interest 
and the interests of investors.\27\
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    \25\ 15 U.S.C. 78k-1(a)(2).
    \26\ 15 U.S.C. 78k-1(a)(3)B).
    \27\ See, e.g., Securities Exchange Act Release No. 41843 (Sept. 
7, 1999), 64 FR 50126 (Sept. 15, 1999) (order directing options 
exchanges to develop strategies to mitigate quote message traffic); 
and Securities Exchange Act Release No. 42029 (Oct. 19, 1999), 64 FR 
57674 (Oct. 26, 1999) (order directing options exchanges to submit 
an intermarket linkage plan).
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    The Commission believes that decimal pricing could benefit 
investors by enhancing investor comprehension, facilitating 
globalization of our markets, and potentially reducing transactions 
costs, depending on the minimum price variant used.\28\ These benefits 
in turn will further the national market system objectives of 
economically efficient execution of securities transactions and fair 
competition.
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    \28\ As discussed above, the U.S. securities markets are the 
only major markets not using decimals. See Wallman Testimony, supra 
note 13.
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    In light of the complex technical and legal issues raised by the 
industry-wide conversion to decimal pricing, a coordinated industry 
effort is necessary to ensure that the markets continue to operate in 
an efficient, orderly, and fair manner during the conversion process. 
In particular, the Participants will need to convert the systems 
governing the quotation, trading, reporting and surveillance of 
securities traded on their marketplaces. In addition, the Participants 
may need to discuss the market-wide impact of small minimum, price 
variations, such as one penny, on trading rules, such as priority and 
trade-through rules. Similarly, clearing agencies will need to modify 
their systems to clear and settle trades priced in decimals. Entities 
that operate systems that link the different markets or disseminate 
information, such as the Intermarket Trading System and CTA, also will 
need to allow for quotation and reporting in decimals. Because 
information is processed and shared among all of these entities, it is 
imperative that all market participants convert to decimals in a 
coordinated manner.
    The Commission therefore finds that the public interest in 
maintaining fair and orderly markets is furthered by requiring the 
Participants to work jointly in discussing, developing, and 
implementing a Decimals Implementation Plan, and by discussing the plan 
with the Interested Parties. To ensure a smooth conversion to decimal 
pricing, the Commission is directing the Participants to develop a 
Decimals Implementation Plan and requiring each Participant to submit 
for notice, comment and Commission consideration the rule changes 
necessary to implement the plan.

III. Plan

    While the Commission is not mandating the details of a Decimals 
Implementation Plan, the plan must provide that decimal pricing of at 
least some equities (and options on those equities) trading on the 
Participants' markets will begin no later than July 3, 2000, and 
decimal pricing of all equities and options on the Participants' 
markets will be completed within six months of that date.\29\ If the 
Participants adopt a phase-in plan for implementing decimal pricing, 
rather than pricing all equities and options on the Participants' 
markets in decimals on July 3, 2000, the plan must provide specific 
dates by which each phase will be completed and identify which 
securities will be priced in decimals during each phase. The Decimals 
Implementation Plan may fix the minimum increment during the phase-in 
period, provided that the minimum increment is no greater than five 
cents for any equity priced in decimals. The Commission believes that 
it is appropriate for the Participants to establish a minimum increment 
during the phase-in period to allow the industry to make a smooth 
transition to decimal pricing and to determine the impact of decimal 
pricing on trading rules and inter-market systems capacity.\30\
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    \29\ The Commission is not mandating that the phase-in period 
last six months. Instead, six months is the maximum time period for 
phasing in decimal pricing. After considering options capacity 
studies and after discussions with the industry, the Commission 
believes that six months provides adequate time for the Participants 
to make an orderly transition to decimal pricing while responding to 
changes in the markets that could result from the conversion from 
fractions to decimals.
    \30\ See supra note 23.
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    The Commission also believes that the securities industry should 
study the impact of quoting and trading in increments smaller than a 
nickel on trading patterns and capacity. For example, there are 
concerns that OPRA may not have a sufficient capacity to handle 
increased quote traffic resulting from the conversion to decimal 
pricing and other market changes.\31\ As a result, queuing and stale 
quotes may become an issue if quote traffic exceeds OPRA's 
capacity.\32\ Therefore, in the event that the Participants adopt a 
phase-in plan using a minimum increment greater than a penny, the 
Participants should also concurrently establish a pilot program that 
provides for selected securities (equities and options on those 
equities) to be traded in penny increments. The pilot should allow the 
Participants and the Commission to evaluate the effect of smaller 
trading increments on capacity and trading behavior. The pilot should 
run concurrently with the phase-in period and should be considered part 
of the Decimals Implementation Plan.
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    \31\ See SIAC/SRI Consulting, Mitigating Options Message Traffic 
Final Report (Dec. 14, 1999).
    \32\ Id. at 1.
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    Thirty days after the end of the phase-in period, the Participants 
must submit (1) a study to the Commission regarding the impact of 
decimal pricing on trading and capacity, including the impact of the 
pilot program, and (2) a recommendation regarding the need for uniform 
minimum increments, if any. The recommendation should discuss whether 
one uniformn minimum increment should be adopted or

[[Page 5006]]

whether different minimum increments should be applied and the criteria 
by which the Participants would select securities to be traded in those 
various minimum increments. Thirty days after submitting their study 
and recommendation, and absent Commission action, the Participants 
individually must submit for notice, comment and Commission 
consideration proposed rule changes to implement their individual 
choice of minimum increments by which equities and options are quoted 
and traded on their respective markets.
    It is hereby ordered, pursuant to Section 11A(a)(3)(B) of the Act, 
\33\ that the Participants act jointly in discussing, developing and 
submitting to the Commission a Decimals Implementation Plan, as 
described above. The Participants are ordered to submit to the 
Commission a Decimals Implementation Plan for the equity and options 
markets no later than 45 days after the issuance of this Order. In 
addition, each Participant is ordered to submit for notice, comment and 
Commission consideration the rule changes necessary to implement the 
Decimals Implementation Plan no later than 60 days after the issuance 
of this Order. \34\ The Participants are also directed to submit a 
study and recommendation, as described in this Order, 30 days after the 
phase-in period. In addition, absent Commission action, 30 days 
following the submission of the study, each Participant must submit 
rule changes implementing their individual choice of minimum pricing 
increments for their respective markets for notice, comment and 
Commission consideration.
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    \33\ 15 U.S.C. 78k-1(a)(3)(B).
    \34\ Although Commission staff may be consulted in discussing 
the proposed Decimals Implementation Plan, staff presence at joint 
discussions is not required by this Order. In issuing this Order, 
the Commission does not address: (a) any joint or other conduct that 
occurred prior to the issuance of this Order, and (b) any joint or 
other conduct occurring after the date of this Order that is not 
ordered or requested by this Order.
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    This Order will be effective until such time as the implementation 
of decimal pricing is completed.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-2286 Filed 02-01-00; 8:45 am]
BILLING CODE 8010-01-M