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Quote Traffic May Choke Nasdaq in Switch to Decimals, GAO Warns


WASHINGTON — The rocketing Nasdaq Stock Market may have serious problems handling the enormous rise in quote traffic when the switch to decimal pricing from fractional pricing is made later this year, the General Accounting Office warned Wednesday.

A study conducted by a private consulting firm and cited in a GAO review presented to a congressional panel projected that message traffic for stock and options quotes would likely rise dramatically when decimal trading begins.

"They're having trouble processing their current demands without decimal trading so there are things Nasdaq is going to have to do to ready itself for decimals," Davi D'Agostino, GAO acting associate director for financial institutions and market issues, told the panel.

Nasdaq--which set a trading volume record Wednesday as investors continue to trade technology stocks at a feverish pace--will not be able to participate in two industry-wide decimal trading processing tests slated for April and May. A third test had to be scheduled for June to accommodate Nasdaq, according to the GAO review.

Nasdaq has conceded that it faces major capacity issues in the switch to decimals, as more investors are expected to enter quotes and trade more often.

In January, the Securities and Exchange Commission ordered U.S. securities markets to begin quoting stock and option prices in nickel increments--versus the standard eighth-of-a-dollar (12.5-cent) increment of today--beginning July 3. The move is aimed at boosting competition and giving investors the best possible price.

After a month, all stocks would be quoted in nickel increments and a pilot project would be conducted in which a few stocks would be quoted in penny increments to assess the impact.

But trading of stocks in penny increments could vault quote message traffic on Nasdaq by as much as 700% by December 2001, according to the GAO review, which cited a study conducted by SRI Consulting.

By contrast, the New York Stock Exchange, with much lower trading volume than Nasdaq, appears to be more likely to be able to successfully handle decimal trading by 2001, GAO said.

Nasdaq is not alone in having system capacity problems, according to the GAO. The Options Price Reporting Authority, which administers the systems used to disseminate trade and price quotation messages for the options markets, will also face a tough challenge dealing with the rise in message traffic as price increments shrink.

While the progression from fractions to decimals will be staggered, many members of the House Commerce Subcommittee on Finance expressed concern Wednesday that the process was moving too quickly for the securities industry.

The switch to trading in pennies and nickels will likely create a one-time cost to the securities industry of about $907 million--and save investors anywhere from $300 million to almost $2 billion annually as stock "bid" and "asked" price spreads shrink, GAO's D'Agostino said.

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