Traders get the point (decimal point)

CHICAGO -- Wall Street is almost ready to begin doing decimals, with the New York Stock Exchange and the Nasdaq Stock Market preparing pilot programs in decimal trading for September.

Investors and federal regulators are eager for the change. But traders at an industry conference last week said they're concerned that the switch from fractions will overwhelm a market already pressed by longer trading hours and soaring volume.

''All of us are investing a tremendous amount of capital -- financial and human -- to prepare for this change,'' said Peter Madoff, senior managing director at Bernard L. Madoff Investment Securities.

The move to decimalization will end a 200-year-old tradition of quoting stock prices in fractions. As a precursor to the change, exchanges in 1997 began quoting stocks in sixteenths of a dollar. Until then, stocks had been traded in eighths.

As a result, the price of a share of AT&T can now be expressed as 34 15/16. Newspapers and many Web sites have already switched to decimals, listing that price as $34.938.

It isn't yet clear whether stocks will be traded in 5-cent or 1-cent increments. The New York Stock Exchange will begin testing the decimal system this September with a basket of 50 stocks traded in pennies. The Nasdaq Stock Market will follow a similar timetable, and officials have said the market's all-electronic trading system will be prepared for either nickel or penny price increments.

Either way, traders are in no hurry. In a survey of members of the Security Traders Association, released at the group's Chicago convention this week, the STA found 47 percent saying they believe that nickels should be the smallest increment used for price quotes. About 20 percent wanted the exchanges to begin by trading in nickels, with an eventual move to pennies.

Seventeen percent thought that prices should be quoted in pennies right from the start. But the rest, about one in seven, would rather continue trading in fractions.

There's one clear, bottom-line reason for traders to favor the current system. Decimal trading will narrow the spread on stocks -- the difference between the price at which a broker will buy a stock and the price at which he sells to a customer. Brokers make their profits from the spreads.

But traders and other brokerage officials at the STA conference claimed that the slimmer spreads aren't the reason for their ambivalence. They've already dealt with shrinking spreads as a result of the switch from eighths to sixteenths.

Initially, profits did slip, said Thomas M. Joyce, managing director and head of equity market structure at Merrill Lynch.

''But eventually, traders being adaptive animals, they figured it out,'' he said. Joyce said traders scrambled to increase the number of trades they handled, therefore replacing profits from the spread with profits made from commission fees.

Lawmakers who support the switch to decimal trading have long argued that the change will reduce trading expenses for ordinary investors, estimating savings totaling about $3 million a day.

But, market experts argued, if traders persuade their clients to buy or sell stocks more frequently, few ordinary folks will realize those benefits.

''It's not an automatic plus,'' said Robert Forney, president and chief executive officer of the Chicago Stock Exchange. ''For Ma and Pa and Farmer Brown, there could be added costs, if anything.''

Proponents of decimal trading believe that dollars-and-cents price quotes are easier for small investors to understand. The switch, they say, will increase trading volume and improve liquidity.

Officials at trading firms didn't dispute that claim, but several wondered whether investors will benefit from either factor.

''It will create a better environment to get in and out of stocks,'' Madoff said. ''If you're a long-term investor, though, that may not be an advantage.''

Decimalization, of course, is just one of several dramatic changes sweeping through the securities industry. It's taken center stage now that last year's A-list issue -- the Year 2000 computer conversion -- is off the table.