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SEC Roundtable Will Tackle 'Death Star' of Decimalization

Joe Mont | December 4, 2012

The Securities and Exchange Commission will host a roundtable on Feb. 5 to discuss the impact of decimal-based stock trading on small- and mid-sized companies, market professionals, investors, and securities markets.

Domestic stock markets adopted decimal pricing increments in place of fractions in 2001, in part to address concerns the U.S. was at a competitive disadvantage to outside markets that had moved on from a centuries-old fractional pricing approach. Proponents of decimal pricing claimed  evidence of artificially wide spreads — the difference between the price to buy and sell a stock — with fractional pricing, which might benefit market makers at the expense of investors.

Since the advent of decimalization, however, concerns have been raised that it may be detrimental to small and mid-sized companies.In 2010, an analysis by audit firm Grant Thornton characterized the negative effect of decimalization on equity markets as a “death star.”

The following year, a Treasury Department conference on access to capital for emerging companies led some participants to form the IPO Task Force. A report by the group found that market structure changes associated with decimalization favor short-term trading strategies over long-term fundamental strategies which, for smaller public company stocks with lower liquidity, results in trading volume that is too low “to make money for the investment bank's trading desk.” The IPO Task Force Report argues that this lack of profitability undermines the incentive for underwriters to take smaller companies public.

The task force also found that decimalization “put the economic sustainability of sell-side research departments under stress by reducing the spreads and trading commissions that formerly helped to fund research analyst coverage.” It argued that analyst coverage has, as a result, significantly shifted away from small capitalization stocks and towards highly liquid, larger capitalization stocks, reflecting the change in financial institution focus.

The Jumpstart Our Business Startups Act (JOBS Act), enacted in April, directed the SEC to conduct a study of the effects of decimalization on initial public offerings and on small and middle-capitalization companies. In a report to Congress, Commission staff recommended that a cross-section of financial markets and the business community  be invited to share their views on the impact of decimalization and what, if any, changes should be considered. That recommendation led to the roundtable planned for early next year.

The upcoming roundtable will be held on at the SEC's Washington, D.C., headquarters, and will be both open to the public and webcast live. Additional information on the time, agenda and participants will be forthcoming.