[Infowarrior] - SEC Weighs Bringing Back Fractions in Stock Prices

[Richard Forno]

This also would likely kill the HFT algo community who makes its money by trading immense volumes in sub-penny decimal pricing....which I think would be a very, very good thing, but suspect it will be fought tooth-and-nail by the trading industry.  ---rick

Updated October 27, 2012, 6:15 p.m. ET

SEC Weighs Bringing Back Fractions in Stock Prices

By ANDREW ACKERMAN And TELIS DEMOS

http://online.wsj.com/article/SB10001424052970204005004578080780495541260.html

For some stock prices, the new math might look a lot like the old math: Regulators are thinking about bringing back the  fraction.

The move would at least partly undo an 11-year-old rule that replaced fractions of a dollar in stock prices, like 1/8 and 1/16, with pennies. The idea of that change was to trim investors' trading costs: One-cent increments can lead to narrower gaps between the prices at which brokers buy and sell shares—potentially reducing their opportunity to shave off profits.

Those championing the fraction's return say it would spur securities firms to buy and sell more shares of some companies by making it more profitable for them to do so. Opponents say fractions would increase trading costs for investors with little or no benefit to companies.

Discussions are still in the early stages and it is unclear what the Securities and Exchange Commission will ultimately decide. Furthermore, any change would affect only some smaller companies. "People are increasingly raising this idea with us directly," SEC Chairman Mary Schapiro said in an interview. "We will look at it, but there are obviously trade-offs."

The idea will be discussed by the SEC's staff at a public meeting in coming weeks. That could lead to a pilot test to help the agency learn more about the idea, according to people familiar with the process.

It isn't clear if the pilot program would apply to companies that fall below a certain market value or trading volume, or whether certain companies would be allowed to choose fractional pricing instead of pennies.

11 Years

The length of time that the rule eliminating fractions for stock prices has been in place.

Arthur Levitt, who oversaw the move to decimal pricing as head of the SEC from 1993 to 2001, said the switch to decimalization "transferred billions of dollars from the pockets of brokers into the pockets of investors." But he doesn't object to a pilot testing alternative stock-price increments.

An SEC study this summer said the effect of decimalization on the cost of large transactions is "mixed."

The move to decimalization was the culmination of an intense debate about the power of market-makers for stocks, such as the specialist traders who worked on the floor of the New York Stock Exchange. Regulators accused several firms of abusing their position to profit by improperly raising the cost of trading.

The push to revert to wider "tick sizes," as traders call them, comes amid an argument over whether or not decimalization has made markets less welcoming for small companies looking to attract investors to their initial public offerings of stock. Some executives, banks and advisers say that banks do less to drum up investor interest in these shares because of lower profits.

As evidence, people in this camp point to the decline in the number of U.S.-listed company IPOs raising less than $50 million. In the late 1990s there were typically more than 100 such IPOs a year, compared with fewer than 10 so far this year, according to Dealogic.

If you move away from penny pricing, "investment banks will be able to make enough money trading…to write research and re-create the spark in the engine," said Jeffrey Solomon, chief executive of Cowen & Co., an investment bank focused on smaller companies that is part of Cowen Group Inc.

Others disagree. "If your goal is to lure investors back into the market, raising their transaction costs doesn't seem like a  particularly good way to do it," said Barbara Roper, director of investor protection at the Consumer Federation of America, a nonprofit consumer advocate.

SEC officials are considering either proposing a rule themselves—or asking the exchanges where stocks are listed, such as those operated by NYSE Euronext, Nasdaq OMX Group Inc. and BATS Global Markets Inc., to propose a rule—for a pilot program to test fractional stock prices, said people familiar with the agency. Some SEC staffers believe the use of different tick sizes in some overseas markets shows that a one-size-fits-all approach isn't the only way to go, these people said.

The pressure to change how stocks are priced is coming in part from Republican lawmakers, small-company executives, venture-capital firms and banks dealing with small companies, many of whom also backed passage this year of the federal Jumpstart Our Business Startups Act, or JOBS Act. The White House and legislators said that law would spur job creation by making it easier for small companies to raise capital.

The JOBS Act required that the SEC study decimalization. The agency in July reported that there was wide academic agreement that "spreads," the prices at which investors want to buy and sell stocks, have narrowed since decimalization. But its report said research was inconclusive about the relationship between decimalization and bank-trading profits.

Some on Wall Street share the view that there is no clear link between decimal pricing and bank trading profits. "We wouldn't look to tick size as a material solution to the bigger problems in the IPO market. That probably has more to do with macro effects than micro effects: a sour economy…and geopolitical uncertainty," said Jamie Selway, head of liquidity management at ITG Inc., an independent Wall Street brokerage firm that sells computerized trading algorithms and operates a "dark pool," where stocks can be traded at sub-penny prices.

The SEC's review urged further study of tick sizes. But JOBS Act advocates have pressed for action on the matter.

"We don't need more study," said Christine Jacobs, chief executive of small-cap company Theragenics Corp. and the co-chairman of the SEC's Advisory Committee on Small and Emerging Companies, which includes venture capitalists, securities lawyers, investment bankers and executives in technology companies.

She said her group is preparing its own proposal to submit to the commission. "We need to find a way to apply the JOBS Act to companies that are already public."

Corrections & Amplifications 
Jeffrey Solomon is chief executive of Cowen & Co. An earlier version of this article incorrectly said he was chief executive of the investment bank's parent, Cowen Group Inc.

Write to Andrew Ackerman at andrew.ackerman at dowjones.com and Telis Demos at telis.demos at wsj.com

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