[14111]
November 6, 2001
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 40-01
SEC RULES COMMITTEE No. 87-01
RE: DRAFT INSTITUTE COMMENT LETTER ON SEC SUBPENNY CONCEPT RELEASE
As we previously informed you,1 the Securities and Exchange Commission has issued a
concept release requesting comment on the impact of trading and potentially quoting securities
in increments of less than a penny. The Institute has prepared a draft comment letter (attached)
on the concept release. The draft letter states that while the Institute supported the move from
fractional pricing to decimal pricing in the U.S. securities markets, we strongly oppose the entry
of orders and the quoting of securities in subpennies.
In particular, the draft letter states that permitting the entry of orders and the quoting of
securities in subpennies would eliminate much of the benefits brought by decimalization and
would exacerbate many of the unintended consequences that have arisen in the securities
markets since its implementation, which have proven harmful to mutual funds and their
shareholders. For example, while the move to pricing in whole pennies has enhanced the
ability of investors to more fully understand the prices at which securities are quoted, quoting
securities in subpennies would make it more difficult for investors (as well as market
participants executing orders for investors) to understand these prices which, in turn, would
make it more difficult to trade securities.
The draft letter also states that the Institute is concerned about the effect of quoting
securities in subpennies on market transparency and depth. The letter notes that preliminary
data has shown that the implementation of decimalization has already had an adverse impact
on transparency and depth of book and that displaying consolidated quotes in subpenny
increments would further reduce the displayed quote size and overall depth of the markets.
The letter also notes that the reduction in market transparency and depth that would occur in a
subpenny environment would adversely affect liquidity, especially for mutual funds and other
institutional investors that need to execute relatively large-sized orders.
In addition, the draft letter states that much of the difficulties that institutional investors
have experienced trading large orders since the implementation of decimalization has been
caused by increased instances of stepping-ahead of limit orders. The letter notes that permitting
1 See Memorandum to Equity Markets Advisory Committee No. 26-01 and SEC Rules Committee No. 61-01, dated
July 24, 2001.
2
the entry of orders and the quoting of securities in subpennies would allow a trader to gain
priority over another trader by bidding as little as $.001 more for the same security with almost
no risk of loss and that this potential for the increased stepping-ahead of limit orders would
create a significant disincentive for market participants to enter any sizeable volume into the
markets.
Finally, the draft letter states that it would be especially inappropriate to permit the
entry of orders and the quotation of securities in subpennies before addressing several
unresolved market structure issues. In particular, the letter notes that it has become more
important than ever to ensure that all markets display a meaningful depth of book and establish
appropriate priority rules for orders entered into the market and that it would be nothing more
than folly to permit the entry of orders and the quoting of securities in subpennies before we
have established an appropriate regime for trading in pennies.
For these reasons, the draft letter recommends that one penny be established as the
minimum price variation in the securities markets. This minimum price variation should apply
to both the entry of orders and the quoting of securities as well as in the case of any trading
rules or practices under which a market participant obtains priority over another order.
Comments on the concept release are due to the SEC no later than November 23, 2001.
If you have any comments on the draft Institute letter, please provide them to the
undersigned by phone at (202) 371-5408, by fax at (202) 326-5839, or by e-mail at
aburstein@ici.org no later than November 15.
Ari Burstein
Associate Counsel
Attachment
Attachment (in .pdf format)