[Federal Register Volume 65, Number 76 (Wednesday, April 19, 2000)]
[Notices]
[Pages 21046-21048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-9789]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42685; File No. 4-430]


Order Staying the Deadlines for Decimal Implementation and Notice 
of Request for Comment on Revised Decimal Implementation Schedules

April 13, 2000.
    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.
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    \1\ See Securities Exchange Act Release No. 42360 (Jan. 28, 
2000), 65 FR 5004 (Feb. 2, 2000) (``Decimals Order'').
    \2\ Since 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 FR14637 (March 
17, 2000) (``Extension Order'').
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    On March 6, 2000, despite previous assurances of readiness, the 
NASD announced that The Nasdag 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\
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    \3\ See Letters from Frank G. Zarb, Chairman and Chief Executive 
Officer, NASD, to Arthur Levitt, Chairman, Commission, dated March 
6, 2000 and March 21, 2000.
    \4\ Nasdaq 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.

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[[Page 21047]]

    The Commission remains committed to implementing decimal pricing an 
expeditiously as possible. Decimal pricing could benefit investors by 
enhancing investor comprehension, facilitating globlization 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.
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    \5\ The 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.
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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\
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    \6\ For 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.
    \7\ See 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'').
    \8\ See Letter from Richard Ketchum, President, NASD, to Annette 
Nazareth, Director, Division of Market Regulation (``Division''), 
and Robert L.D. Colby, Deputy Director, Division, Commission, dated 
April 12, 2000.
    \9\ Id.
    \10\ See 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, Commission, dated April 10, 2000
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    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\
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    \11\ The Participants also noted that systems and applications 
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.
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    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.
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    \12\ See 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'').
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    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 
on 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

[[Page 21048]]

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 optional 
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, NW., Washington, DC 20549-0609. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All submissions should refer to File No. 4-430 and should be submitted 
by May 10, 2000. 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://ww.sec.gov).

III. Conclusion

    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,
Secretary.
[FR Doc. 00-9789 Filed 4-18-00; 8:45 am]
BILLING CODE 8010-01-M