[Federal Register Volume 65, Number 118 (Monday, June 19, 2000)]
[Notices]
[Pages 38010-38014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-15361]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42914]


Order Directing the Exchanges and the National Association of 
Securities Dealers, Inc. to Submit a Phase-in Plan to Implement Decimal 
Pricing in Equity Securities and Options; Pursuant to Section 
11A(a)(3)(B) of the Securities Exchange Act of 1934

June 8, 2000.
    Notice is hereby given that, pursuant to Section 11A(a)(3)(B) of 
the Securities Exchange Act of 1934 (``Exchange 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 International Securities Exchange, LLC (``ISE''), 
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 planning, discussing, developing, and submitting to 
the Commission a plan that will begin phasing in the implementation of 
decimal pricing in equity securities and options on or before September 
5, 2000.\2\ The Participants should discuss the development and 
implementation of the phase-in plan with interested market 
participants, including, but not limited to, the Securities Industry 
Association (``SIA'') and its members, the National Securities Clearing 
Corporation, the Depository Trust and Clearing Corporation (``DTCC''), 
the Options Clearing Corporation (``OCC''), the Securities Industry 
Automation Corporation, the Intermarket Trading System Operating 
Committee, the Options Price Reporting Authority, the Consolidated Tape 
Association, and the Consolidated Quote Operating Committee 
(collectively the ``Interested Parties''). The Commission further 
directs the Participants to submit the phase-in plan to the Commission 
no later than 45 days after the issuance of this Order. Finally, the 
Commission directs each Participant to submit the rule changes 
necessary to implement the phase-in plan no later than 60 days after 
the issuance of this Order.\3\
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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 Commission selected September 5, 2000 as the latest 
start-up date for the phase-in period because it is the first trade 
date following the September 4, 2000 Labor Day holiday.
    \3\ Additional requirements are discussed in the text 
accompanying infra notes 28 through 41.
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1. Background

    On January 28, 2000, the Commission issued an Order \4\ requiring 
the Participants to facilitate an orderly transition to decimal pricing 
in the United States securities markets. The 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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    \4\ See Securities Exchange Act Release No. 42360 (Jan. 28, 
2000), 65 FR 5004 (Feb. 2, 2000).
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    On March 6, 2000, the NASD announced that the Nasdaq Stock Market, 
Inc. (``Nasdaq'') would not have sufficient capacity to meet the target 
dates for implementation.\5\ The NASD also expressed concern 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.\6\
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    \5\ 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.
    \6\ Nasdaq has committed to intensify 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 NASD has assured the Commission that Nasdaq will 
dedicate all required 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 38011]]

    Subsequently, on April 13, 2000, the Commission issued an Order 
staying the original deadlines for decimalization.\7\ In the April 13 
Order, the Commission also requested comment on two alternatives for 
implementing decimal pricing in exchange-listed equity securities this 
year. The first alternative would begin decimal pricing in all 
exchange-listed securities on or before September 4, 2000 (``Dual 
Pricing''). Congressman Thomas Bliley, Michael Oxley, and Edward Markey 
had strongly urged the implementation of decimal pricing on or before 
September 4, 2000 because of the benefits to investors.\8\ The second 
alternative envisioned a temporary or ``pilot'' program to begin 
decimal pricing in certain exchange-listed securities and options on or 
before September 4, 2000 (``Decimals Pilot''). Under both alternatives, 
all stocks would be traded in decimals by March 31, 2001.\9\
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    \7\ See Securities Exchange Act Release No. 42685 (April 13, 
2000), 65 FR 21046 (April 19, 2000) (``April 13 Order''); see also 
Securities Exchange Act Release No. 42516 (March 10, 2000), 65 FR 
14637 (March 17, 2000).
    \8\ 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'').
    \9\ Nasdaq has assured the Commission that it will be able to 
support decimal trading of exchange-listed securities by Labor Day 
of this year (i.e., for the third market), and of Nasdaq stocks by 
March 31, 2001. See Letter from Richard G. Ketchum, President, NASD, 
to Annette Nazareth, Director, Division of Market Regulation 
(``Division'') and Robert L. D. Colby, Deputy Director, Division, 
dated April 12, 2000.
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II. Summary of Comments

    The Commission received 36 comment letters on the decimal 
implementation alternatives presented in the April 13 Order.\10\ Nine 
individuals urged the Commission to support full decimalization for 
both exchanged-listed and Nasdaq securities either immediately or no 
later than the July 3, 2000 start-up date proposed in the Commission's 
original Order.\11\ Two vendors favored the Dual Pricing alternative 
proposed in the April 13 Order, in which all exchange-listed stocks 
would be priced in decimals on or before September 4, 2000.\12\ Nine 
commenters, consisting of broker-dealers, exchanges, and service 
bureaus, however, argued in favor of postponing any decimalization 
until a date closer to when Nasdaq is prepared to price its securities 
in decimals on March 31, 2001.\13\ The remaining 16 commenters, 
consisting of broker-dealers, exchanges, clearing organizations, the 
NASD, and the SIA, supported some form of phased-in dual pricing on or 
before September 4, 2000.\14\
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    \10\ Copies of the comment letters are available in the Public 
Reference Room in file No. 4-430.
    \11\ See e-mail from Nathaniel J. Olsson, dated April 23, 2000; 
e-mail from Don Welsh, dated April 23, 2000; e-mail from Michael 
Esch, dated April 22, 2000; e-mail from H. Rogers, dated April 23, 
2000; e-mail from D. Zilant, dated April 23, 2000; e-mail from Steve 
Sutherland, dated May 3, 2000; e-mail from Patrick Murray, dated May 
4, 2000; e-mail from Douglas Hawkins, dated May 23, 2000; and e-mail 
from Peter Pfieffer, dated May 12, 2000 (who identifies himself as a 
programmer analyst and sees no technical bars to implementing 
decimal pricing by July 3, 2000).
    \12\ See letter from Don Finucane, Vice President, Marketing and 
Product Development, Standard & Poor's Comstock, dated May 10, 2000 
(``S&P Comstock Letter''); and e-mail from ILX Systems, dated May 3, 
2000 (``ILX E-Mail'').
    \13\ Several commenters argued that decimalization should wait 
until all major securities markets, including Nasdaq, are ready to 
begin simultaneous. See letter from Fred Reif, Senior Vice 
President, A.G. Edwards & Sons, Inc., dated May 9, 2000 (``A.G. 
Edwards Letter''); letter from Paul B. O'Kelly, Executive Vice 
President, Market Regulation and Legal, CHX, dated May 9, 2000 
(``CHX Letter''); letter from Bob Munro, Senior Director, ADP/SIS, 
dated May 15, 2000 (``ADP/SIS Letter''); letter from Norman Eaker, 
Principal, Edward Jones, dated May 9, 2000 (``Edward Jones 
Letter''); e-mail from Robert B. Sloan, Partner, Director of 
Information Services, J.C. Bradford, dated April 13, 2000 
(``Bradford E-Mail''); letter from W. Leo McBlain, Chairman, and 
Thomas J. Jordan, Executive Director, Financial Information Forum, 
dated May 15, 2000 (``FIF Letter''); letter from Michael J. Ryan, 
Jr., Chief of Staff, AMEX, dated May 25, 2000 (``AMEX Letter''); and 
e-mail from Jeffrey C. Wells, Senior Vice President, Bridge 
Information Systems, dated May 10, 2000 (``Bridge E-Mail''). One 
commenter indicated that, in view of the complexities involved and 
the need for adequate planning and testing, the beginning of any 
decimalization should be delayed until mid to late October, 2000. 
See e-mail from Joyce L. Ulrich, First Vice President, Brokerage 
Applications, Legg Mason, dated May 9, 2000 (``Legg Mason E-Mail''). 
One commenter suggested that the date for full decimalization 
implementation be moved from March 31, 2001 to April 30, 2001. See 
letter from Tracey E. Curvey, Executive Vice President, Online 
Brokerage Group, Fidelity Investments, dated May 25, 2000 
(``Fidelity Letter''). In addition, one commenter suggested that 
decimalization in exchange-listed securities should be initiated no 
sooner than early January 2001 in order to shorten the period of 
dual pricing until decimal pricing in Nasdaq securities can begin on 
March 31, 2001. See letter from Michael J. Simon, Senior Vice 
President and General Counsel, ISE, dated May 10, 2000 (``ISE 
Letter'').
    \14\ Several commenters favored the Decimals Pilot starting on 
or before September 4, 2000. See letter from Charles J. Henry, 
President and Chief Operating Officer, CBOE, dated May 2, 2000 
(``CBOE Letter''); letter from Scott G. Abbey, Chief Information 
Officer and Executive Vice President, Paine Webber, Inc., dated May 
8, 2000 (``BSE Letter''); letter from Marc E. Lackritz, President, 
SIA, dated May 10, 2000 (``SIA Letter''); letter from Robert C. 
King, Chairman, and Lee Korins, President and Chief Executive 
Officer, Securities Traders Association, dated May 12, 2000 (``STA 
Letter''); letter from Wayne P. Luthringshausen, Chairman, OCC, 
dated may 17, 2000 (``OCC Letter''); and letter from Philip D. 
DeFeo, Chairman and Chief Executive Officer, PCX, dated May 17, 2000 
(``PCX Letter''). DTCC indicated that it would be ready for the 
Decimals Pilot on or before September 4, 2000, but indicated that it 
may be prudent to wait until September 25, 2000, after the options 
expiration cycle has concluded. See letter from Dennis J. Dirks, 
Chief Operating Officer, DTCC, dated May 12, 2000 (``DTCC Letter''). 
The PHLX indicated that the Decimals Pilot starting on or before 
September 4, 2000 was feasible and clearly preferable to the Dual 
Pricing alternative, but acknowledged that decimal trading ideally 
should begin at the end of February 2001. See letter from Meyer S. 
Frucher, Chairman and Chief Executive Officer, PHLX, dated May 10, 
2000 (``PHLX Letter''). The NYSE preferred a modified phase-in 
schedule that would rapidly expand the number of exchange-listed 
securities subject to decimal pricing (this proposal is described 
fully below). See letter from James E. Buck, Senior Vice President 
and Secretary, NYSE, dated May 16, 2000 (``NYSE Letter''). A major 
clearing firm also favored a flexible Decimals Pilot that would 
allow for the addition of more securities if conditions permit. See 
letter from C. Michael Viviano, Chairman, BNY Clearing Services, 
LLC, dated April 27, 2000 (``BNY Letter''). The NASD indicated that 
it could be ready for either Dual Pricing or the Decimals Pilot 
starting on or before September 4, 2000. See letter from Joan C. 
Conley, Senior Vice President and Corporate Secretary, NASD, dated 
May 10, 2000 (``NASD Letter''). One commenter indicated that, while 
Dual Pricing on or before September 4, 2000 was feasible, minimum 
pricing increments of a nickel (presumably for at least a phase-in 
period) would be best in order to permit the industry to experience 
potential volume increases at a slower pace. Moreover, this 
commenter acknowledged that dual pricing could result in confusion 
for its ``traders, clearing clients, and prime brokers.'' See e-mail 
from George Tumas, Managing Director, Banc of America Securities, 
dated May 10, 2000 (``Banc of America E-Mail''). Similarly, another 
commenter indicated that, while it would be ready for Dual Pricing 
on or before September 4, it would recommend that decimal pricing 
begin with a large number of exchange-listed securities in nickel 
minimum pricing increments. After a thorough evaluation of its 
impact on system and line capacity, decimal pricing in penny 
increments could begin at a later stage. See e-mail from Sara 
Banerjee, Vice President, Data Operations and Procurement, and Doug 
O'Hearen, Vice President, Development, Telekurs Financial, dated May 
10, 2000 (``Telekurs E-Mail'').
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A. Immediate Decimalization

    Nine individual investors argued in favor of the Commission 
mandating all markets to begin decimal pricing in all securities either 
immediately or at least by the original July 3, 2000 start-up date. 
These commenters did not address how the markets and the securities 
industry could accomplish the conversion to decimalization in an 
orderly manner.

B. Full Dual Pricing Starting On or Before September 4, 2000

    Two vendors stated that they would be ready for the Dual Pricing 
alterntaive proposed by the April 13 Order.\15\ One of the commenters 
stated that, from a market data vendor's point of view, it would 
strongly prefer trading to

[[Page 38012]]

commence in all exchange-listed securities in decimals on or before 
September 4, 2000 (compared to the Decimals Pilot).\16\
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    \15\ See S&P Comstock Letter and ILX E-Mail supra note 12.
    \16\ See S&P Comstock Letter supra note 12.
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C. Postponement Until Dates Closer to March 31, 2001

    Nine commenters, including broker-dealers, exchanges, and service 
bureaus, argued that the Commission should implement a relatively brief 
phase-in period for both exchange-listed and Nasdaq securities--but 
that the beginning date for this process should be postponed until a 
date closer to when Nasdaq is prepared to begin pricing its securities 
in decimals on March 31, 200.\17\ These commenters were concerned about 
the potential systems difficulties and investor confusion that could 
arise from an extended period in which exchange-listed securities were 
priced in decimals while Nasdaq securities were still priced in 
fractions. The commenters stressed the benefits of postponing 
decimalization until the conversion could begin in both exchange-listed 
and Nasdaq securities at the same time. Nevertheless, while these 
commenters believed that a later start-up date would be advisable or 
preferable, most recognized that a phase-in schedule starting on or 
before September 4, 2000 would be technically feasible.
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    \17\ See supra note 13.
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D. Phase-In Starting On or Before September 4, 2000

    As discussed above, the remaining commenters agreed that some form 
of phase-in for decimal pricing for exchange-listed securities could 
begin on or before September 4, 2000. Some of these commenters 
preferred an extended pilot of only a small number of securities (along 
the lines of the Decimals Pilot alternative proposed for comment in the 
April 13 Order).\18\ For example, the SIA believed that a pilot was 
more feasible than Dual Pricing because a pilot would, among other 
things, minimize the difficulties faced by the securities industry to 
create and maintain separate processes, systems, programs, and 
procedures for both decimals and fractions and would simplify the 
educational effort directed at the investing public to assist them in 
understanding how specific securities would be priced.\19\ Other 
commenters, however, supported a more aggressive phase-in of decimal 
pricing in all exchange-listed securities. The NYSE, for example, 
favored commencing decimal pricing in a limited number of NYSE-listed 
securities, advancing to a full pilot of perhaps 50 NYSE-listed 
securities during an initial phase-in period of one month or less. The 
NYSE indicated that an expansion to all of its listed securities could 
prudently occur after approximately 60 days of trading in all pilot 
stocks.\20\ All of these commenters stressed the need for careful 
planning and systems testing to avoid potential market disruptions and 
to minimize investor confusion.
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    \18\ See supra note 14.
    \19\ See SIA Letter supra note 14.
    \20\ See NYSE Letter supra note 14.
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E. Minimum Price Increments

    The majority of commenters who favored a phase-in process for 
exchange-listed stocks also believed that at least some exchange-listed 
securities should be quoted in minimum price increments of a penny. For 
example, the NYSE favored pricing in pennies in at least some stocks 
from the beginning of any pilot.\21\
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    \21\ See id.
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F. Options Pricing

    Several of the commenters who favored beginning the decimalization 
phase-in of exchanged-listed securities on or before September 4, 2000, 
nevertheless recognized that this could present significant problems 
for the options markets. For example, the three options exchanges that 
supported some form of phase-in starting on or before September 4, 2000 
cited that potential strains on options price reporting systems that 
could result from widespread decimal pricing in both exchange-listed 
securities and their related options.\22\ These concerns were also 
reflected in the comment letters from the SIA and the OCC.\23\ These 
commenters indicated that plans for the decimalization phase-in should 
take these concerns into account when setting minimum price increments 
for both stocks and options, and that it could be necessary to a least 
temporarily permit some options to trade at wide price increments than 
those permitted in the related stocks. For example, the SIA and the OCC 
recommended that options price increments be maintained in a similar 
manner to what is in existence today, i.e., options with premiums 
quoted under $3 per contract would be quoted in nickle increments and 
options with higher priced premiums would be quoted in dime 
increments.\24\
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    \22\ The CBOE and PCX favored a phase-in in the form of an 
extended pilot of decimal pricing in a small number of stocks. See 
CBOE Letter and PCX Letter supra note 14. While the PHLX also 
supported a pilot, it indicated that widespread decimal pricing in 
listed stocks would be feasible ``with a controlled, phase-in 
initial period.'' See PHLX Letter supra note 14.
    \23\ See SIA Letter and OCC Letter supra note 14.
    \24\ See SIA Letter and OCC Letter supra note 14.
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III. Discussion

    Section 11A(a)(2) of the Exchange 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 Exchange Act to facilitate the establishment of a national 
market system for securities. Section 11A(a)(3)(B) of the Exchange Act 
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-1a(a)(B).
    \27\ See, e.g., Securities Exchange Act Release No. 41843 (Sept. 
7, 1999), 64 FR 50126 (Sept. 15, 1999); and Securities Exchange Act 
Release No. 42849 (May 26, 2000), 65 FR 36180 (June 7, 2000) 
(directing options exchanges to develop strategies to mitigate quote 
message traffic). The Participants previously requested that, to 
address concerns about antitrust liability, the Commission order 
them to work together to coordinate decimal planning.
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    After careful consideration of the comments received in response to 
the April 13 Order and further analysis, the Commission believes that 
decimal pricing in exchange-listed securities and options should be 
phased in beginning or before September 5, 2000. Because the NASD has 
indicated that it would be possible to initiate a controlled 
decimalization phase-in of a limited number of Nasdaq securities on 
March 12, 2001, the Commission believes that the NASD should implement 
a phase-in plan on that date and extend decimalization to all Nasdaq 
securities no later than April 9, 2001. Accordingly, the Commission 
intends that full implementation of decimal pricing in all exchange-
traded and Nasdaq equity securities and options (``Full 
Implementation'') should be completed no later than April 9, 2001.\28\ 
In view of the variety of concerns over immediate, full-scale 
decimalization in exchange-

[[Page 38013]]

listed securities raised by commenters such as the SIA,\29\ the 
Commission believes that careful phasing in of decimal pricing is 
necessary to ensure the continued orderly operation of the markets and 
clearing organizations.
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    \28\ The Commission selected April 9, 2001 as the deadline of 
Full Implementation to avoid disruptions of securities pricing 
systems at broker-dealers, mutual funds, and other market 
participants during the critical period immediately following the 
quarter-end on March 31, 20001. These pricing systems are essential 
for accurate quarter-end pricing for millions of mutual fund 
investors, as well as for large numbers of institutional investors 
and other market participants who use over-the-counter equity 
derivatives that employ quarter-end expiration cycles.
    \29\ See SIA Letter supra note 14.
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    The Commission recognizes the concerns expressed by members of 
Congress and several small investors that decimal pricing in equity 
securities should be implemented as expeditiously as possible. We 
continue to believe that the conversion to decimal pricing will benefit 
investors by enhancing investor comprehension, facilitating 
globalization of our markets, and potentially reducing transaction 
costs. Nevertheless, the Commission must ensure that the conversion to 
decimal pricing is accomplished in an orderly and safe manners. In view 
of the concerns raised by commenters such as the SIA,\30\ the 
Commission believes that an immediate full-scale introduction of 
decimalization, without adequate planning and systems testing, has the 
potential to create widespread operational problems in the markets and 
the securities industry, which in turn could adversely affect 
investors.\31\
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    \30\ The SIA's concerns over full-scale dual pricing are 
discussed in the text accompanying supra note 19.
    \31\ Moreover, the Commission notes that the securities industry 
almost universally expressed the view that trading the same 
securities in both decimals and fractions would be confusing to 
investors and would disrupt the markets.
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    The Commission is aware of the views of some commenters that the 
optimal conversion process for decimal pricing would involve 
simultaneous implementation plans for both exchange-listed and Nasdaq 
securities. Unfortunately, Nasdaq's inability to begin decimalization 
until March 31, 2001 renders this approach problematic. Moreover, many 
of the commenters that strongly preferred postponing decimal pricing 
until Nasdaq securities could be included recognized that at least some 
decimal pricing in exchange-listed securities would be feasible 
starting on or before September 4, 2000.
    The remainder of the commenters believed that, with proper planning 
and testing, some phase-in of decimal pricing in exchange-listed 
securities and options should begin on or before September 4, 2000.\32\ 
The Commission is therefore directing the Participants to develop a 
phase-in plan to begin decimal pricing exchange-listed securities and 
options on or before September 5, 2000.\33\ The Participants should 
submit this plan to the Commission no later than 45 days after the 
issuance of this Order, and each Participant should submit the rule 
changes necessary to implement the phase-in plan pursuant to Section 
19(b) of the Exchange Act no later than 60 days after the issuance of 
this Order. To facilitate a safe and coordinated conversion to decimal 
pricing, the phase-in plan should include a formal schedule of testing 
and readiness reporting to ensure that all Participants are ready to 
implement decimal pricing within the timeframes specified in the 
plan.\34\ Further, the phase-in plan should provide for decimal pricing 
of at least some options on exchange-listed securities that are 
participating in the phase-in. The plan should provide for the phasing 
in of decimal pricing for at least some Nasdaq securities starting no 
later than March 12, 2001, with decimalization extended to all Nasdaq 
securities no later than April 9, 2001. Finally, the phase-in plan 
should provide for Full Implementation by April 9, 2001.\35\ During 
this period, the Participants and the Commission will carefully monitor 
the effects of decimal pricing on systems capacity, liquidity, and 
trading behavior.
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    \32\ The Commission notes that, while the first industry test 
was held on April 8, 2000, industry testing is still ongoing and 
will continue throughout the summer.
    \33\ The Commission believes that the Participants should 
continue to canvass their members' readiness for decimalization to 
establish a feasible phase-in schedule with a view towards. Full 
Implementation by April 9, 2001.
    \34\ The Commission expects that the phase-in plan would also 
include a description of the securities industry's educational 
efforts directed at the investing public to assist them in 
understanding how specific securities would be priced.
    \35\ The Commission notes that, while it is mandating a phase-in 
of decimal pricing, the Participants may set a more aggressive 
implementation schedule if they determine that decimal pricing can 
be safely implemented before the April 9, 2001 deadline.
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    There was little agreement among the commenters regarding a minimum 
quoting increment during the phase-in periods; suggestions ranged from 
a dime \36\ to a penny.\37\ As a result, the phase-in plan may fix the 
minimum quoting increment during the phase-in periods, provided that 
the minimum increment is no greater than five cents \38\ and no less 
than one cent for any equity security,\39\ and that at least some 
equity securities are quoted in one cent minimum increments.\40\
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    \36\ See Edward Jones Letter supra note 13.
    \37\ See Letter supra note 14.
    \38\ Reasonable exceptions may be made for high priced 
securities.
    \39\ The plan should provide that the minimum increments are no 
less than one cent for any option on equity securities.
    \40\ The Commission assumes that exchange-listed stocks will be 
quoted on exchanges and the third market in the same increments. 
Participants should consider whether options should trade in the 
same format as the underlying security.
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    After the securities industry has gained some experience with the 
implementation of decimal pricing, the Commission believes that the 
Participants should study the impact of the use of a minimum pricing 
variation of one penny on trading patterns, liquidity, and capacity 
(``Study''). For example, the inter-market communications systems are 
likely to experience increased quote traffic resulting from the 
conversion to decimal pricing and other market changes.\41\ Therefore, 
two months after Full Implementation, the Participants must submit 
(individually or jointly) a study to the Commission regarding the 
impact of decimal pricing on systems capacity, liquidity, and trading 
behavior, including an analysis of whether there should be a uniform 
minimum increment for a security. If a Participant wishes to move to 
quoting in an increment of less than one cent, the Participant should 
include a full analysis of the potential impact of such trading on the 
Participant's market and the markets as a whole.
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    \41\ See SIAC/SRI Consulting, Mitigating Options Message Traffic 
Final Report (Dec. 14, 1999).
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    Within thirty days after submitting the Study, and absent 
Commission action, the Participants individually must submit for 
notice, comment, and Commission consideration, proposed rule changes 
under Section 19)b) of the Exchange Act to establish their individual 
choice of minimum increments by which equities or options are quoted on 
their respective markets.
    It Is Hereby Ordered, pursuant to Section 11A(a)(3)(B) of the 
Exchange Act,\42\ that the Participants act jointly in planning, 
discussing, developing, and submitting to the Commission a phase-in 
plan, as described above. The Participants are ordered to submit to the 
Commission a phase-in plan, as described above. The Participants are 
ordered to submit to the Commission a phase-in plan for the equity and 
options markets no later than July 24, 2000. In addition, each 
Participant is ordered to submit the rule changes necessary to 
implement the phase-in plan no later than August 7, 2000.\43\ This 
Order will be effective until the Commission has acted on the proposed 
rule changes filed

[[Page 38014]]

by the individual Participants pursuant to Section 19(b)(2) of the 
Exchange Act establishing the minimum increments by which equities or 
options are quoted on the respective markets or until otherwise ordered 
by the Commission.
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    \42\ 15 U.S.C. 78k-1(a)(3)(B).
    \43\ Although Commission staff may be consulted in discussing 
the proposed phase-in 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 or prior Orders, and (b) any joint or 
other conduct occurring after the date of this Order that is not 
ordered or requested by this Order.

    By the Commission.
By: Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-15361 Filed 6-16-00; 8:45 am]
BILLING CODE 8010-01-M