Order Directing the Exchanges and the National Association of Securities Dealers, Inc. To Submit a Decimalization Implementation Plan Pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934

Notice is hereby given that, pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934 (“Act”), the Securities and Exchange Commission (“Commission”) orders the American Stock Exchange LLC (“AMEX”), the Boston Stock Exchange, Inc. (“BSE”), the Chicago Board Options Exchange, Inc. (“CBOE”), the Chicago Stock Exchange, Inc. (“CHX”), the Cincinnati Stock Exchange, Inc. (“CSE”), the National Association of Securities Dealers, Inc. (“NASD”), the New York Stock Exchange, Inc. (“NYSE”), the Pacific Exchange, Inc. (“PCX”), and the Philadelphia Stock Exchange, Inc. (“PHLX”) (collectively the “Participants” and individually a “Participant”) to act jointly in discussing, developing, and submitting to the Commission a plan to implement decimal pricing in the equities and options markets beginning no later than July 3, 2000 (“Decimals Implementation Plan”), and in implementing the Decimals Implementation Plan. The Participants should discuss the development and implementation of the Decimals Implementation Plan with interested market participants, including, but not limited to, the Securities Industry Association (“SIA”) and its members, the International Securities Exchange (“ISE”), the National Securities Clearing Corporation (“NSCC”), the Depository Trust Company (“DTC”), the Options Clearing Corporation (“OCC”), the Securities Industry Automation Corp. (“SIAC”), the Intermarket Trading System Operating Committee (“ITSOC”), the Options Price Reporting Authority (“OPRA”), the Consolidated Tape Association (“CTA”), and the Consolidated Quote Operating Committee (“CQOC”) (collectively the “Interested Parties”). The Commission further directs the Participants to submit to the Commission a Decimals Implementation Plan no later than 45 days after the issuance of this Order. Finally, the Commission directs each Participant to submit for notice, comment and Commission consideration the rule changes necessary to implement the Decimals Implementation Plan no later than 60 days after the issuance of this Order.

I. Background

The current convention of quoting stock prices in fractions dates back more than two hundred years. The United States securities markets are the only major markets not to price securities in decimals. For the past few years, market participants and the Commission have discussed the possibility and usefulness of moving to decimal pricing. In January 1994, Commission staff recognized the potential benefits of decimal pricing over the current fraction-based pricing scheme and indicated that a move to decimals was likely to be inevitable. Throughout the mid and late 1990s, the Commission engaged the securities industry and the public in a discussion of the need for decimal pricing in the U.S. securities markets.

On March 13, 1997, this debate moved to the legislative arena when Congressman Oxley introduced a bill in the U.S. House of Representatives that would have directed the Commission to adopt a rule requiring quotations in dollars and cents for transactions in equity securities. Subsequently, the NYSE announced that it would implement decimal pricing by January 2000. Other markets soon followed suit. In light of this activity, the bill was not taken to full markup in the House Commerce Committee.

On May 8, 1998, the General Accounting Office (“GAO”) determined that “[e]nsuring that securities industry systems are ready for the Year 2000 is too important to the continued functioning of the industry to risk failure by attempting to implement decimal trading before the Year 2000 effort is completed.” Chairman Levitt, in the Commission's response to the GAO report, concurred in this assessment. Chairman Levitt noted the importance, however, of setting a date certain by which the markets must move to decimal pricing. He noted that the industry should strive to implement decimal pricing by June 30, 2000. In light of what appears to be a successful resolution of the Year 2000 problem, the Commission believes that the industry's primary technological priority should be the implementation of decimal pricing.

On August 25, 1998, Commission staff requested that the Participants provide information regarding the status of rule and systems changes that would need to be adopted to implement decimal pricing. The Participants' responses indicated that a range of rules and systems would require modification to accommodate decimal pricing. Because many of these rule and systems changes will have an impact on the securities industry as a whole, the Participants must develop a coordinated plan for converting to decimal pricing. To ensure a smooth conversion to decimal pricing, the Commission is therefore directing the Participants to develop a Decimals Implementation Plan and submit rule changes necessary to implement the plan to the Commission.

II. Discussion

Section 11A(a)(2) of the Act directs the Commission, having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to use its authority under the Act to facilitate the establishment of a national market system for securities. Section 11A(a)(3)(B) gives the Commission the ability to authorize or require by order the self-regulatory organizations “to act jointly * * * in planning, developing, operating, or regulating a national market system.” This authority enables the Commission to require joint activity that otherwise might be asserted to have an impact on competition, where the activity serves the public interest and the interests of investors.

The Commission believes that decimal pricing could benefit investors by enhancing investor comprehension, facilitating globalization of our markets, and potentially reducing transactions costs, depending on the minimum price variant used. These benefits in turn will further the national market system objectives of economically efficient execution of securities transactions and fair competition.

In light of the complex technical and legal issues raised by the industry-wide conversion to decimal pricing, a coordinated industry effort is necessary to ensure that the markets continue to operate in an efficient, orderly, and fair manner during the conversion process. In particular, the Participants will need to convert the systems governing the quotation, trading, reporting and surveillance of securities traded on their marketplaces. In addition, the Participants may need to discuss the market-wide impact of small minimum, price variations, such as one penny, on trading rules, such as priority and trade-through rules. Similarly, clearing agencies will need to modify their systems to clear and settle trades priced in decimals. Entities that operate systems that link the different markets or disseminate information, such as the Intermarket Trading System and CTA, also will need to allow for quotation and reporting in decimals. Because information is processed and shared among all of these entities, it is imperative that all market participants convert to decimals in a coordinated manner.

The Commission therefore finds that the public interest in maintaining fair and orderly markets is furthered by requiring the Participants to work jointly in discussing, developing, and implementing a Decimals Implementation Plan, and by discussing the plan with the Interested Parties. To ensure a smooth conversion to decimal pricing, the Commission is directing the Participants to develop a Decimals Implementation Plan and requiring each Participant to submit for notice, comment and Commission consideration the rule changes necessary to implement the plan.

III. Plan

While the Commission is not mandating the details of a Decimals Implementation Plan, the plan must provide that decimal pricing of at least some equities (and options on those equities) trading on the Participants' markets will begin no later than July 3, 2000, and decimal pricing of all equities and options on the Participants' markets will be completed within six months of that date. If the Participants adopt a phase-in plan for implementing decimal pricing, rather than pricing all equities and options on the Participants' markets in decimals on July 3, 2000, the plan must provide specific dates by which each phase will be completed and identify which securities will be priced in decimals during each phase. The Decimals Implementation Plan may fix the minimum increment during the phase-in period, provided that the minimum increment is no greater than five cents for any equity priced in decimals. The Commission believes that it is appropriate for the Participants to establish a minimum increment during the phase-in period to allow the industry to make a smooth transition to decimal pricing and to determine the impact of decimal pricing on trading rules and inter-market systems capacity.

The Commission also believes that the securities industry should study the impact of quoting and trading in increments smaller than a nickel on trading patterns and capacity. For example, there are concerns that OPRA may not have a sufficient capacity to handle increased quote traffic resulting from the conversion to decimal pricing and other market changes. As a result, queuing and stale quotes may become an issue if quote traffic exceeds OPRA's capacity. Therefore, in the event that the Participants adopt a phase-in plan using a minimum increment greater than a penny, the Participants should also concurrently establish a pilot program that provides for selected securities (equities and options on those equities) to be traded in penny increments. The pilot should allow the Participants and the Commission to evaluate the effect of smaller trading increments on capacity and trading behavior. The pilot should run concurrently with the phase-in period and should be considered part of the Decimals Implementation Plan.

Thirty days after the end of the phase-in period, the Participants must submit (1) a study to the Commission regarding the impact of decimal pricing on trading and capacity, including the impact of the pilot program, and (2) a recommendation regarding the need for uniform minimum increments, if any. The recommendation should discuss whether one uniformn minimum increment should be adopted or whether different minimum increments should be applied and the criteria by which the Participants would select securities to be traded in those various minimum increments. Thirty days after submitting their study and recommendation, and absent Commission action, the Participants individually must submit for notice, comment and Commission consideration proposed rule changes to implement their individual choice of minimum increments by which equities and options are quoted and traded on their respective markets.

It is hereby ordered, pursuant to Section 11A(a)(3)(B) of the Act, that the Participants act jointly in discussing, developing and submitting to the Commission a Decimals Implementation Plan, as described above. The Participants are ordered to submit to the Commission a Decimals Implementation Plan for the equity and options markets no later than 45 days after the issuance of this Order. In addition, each Participant is ordered to submit for notice, comment and Commission consideration the rule changes necessary to implement the Decimals Implementation Plan no later than 60 days after the issuance of this Order. The Participants are also directed to submit a study and recommendation, as described in this Order, 30 days after the phase-in period. In addition, absent Commission action, 30 days following the submission of the study, each Participant must submit rule changes implementing their individual choice of minimum pricing increments for their respective markets for notice, comment and Commission consideration.

This Order will be effective until such time as the implementation of decimal pricing is completed.