The Nasdaq stock market may have
serious problems handling the enormous increase in quote traffic
when the switch to decimals from fractions 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,
acting associate director for financial institutions and market
issues at the GAO, told the panel.
Nasdaq will not be able to participate in two industry-wide
decimal trading processing tests which are slated for April and
May, and a third test had to be scheduled for June to
accommodate the market, according to the GAO review presented to
the House Commerce Subcommittee on Finance.
Plus, at present there are no industry-wide tests scheduled
to evaluate capacity limits, D'Agostino said.
A Nasdaq spokesman said the market was in the process of
testing its solutions to convert to decimals in July, and was
preparing for trading volumes to hit peaks of almost 3 billion
"Conversion to decimalization is just going to add to this
exponential increase in message traffic," said Scott Peterson,
the Nasdaq spokesman. "We're in a marathon race to stay ahead
of this tidal wave of share orders and so far we've managed to
stay ahead of the curve."
Asked whether Nasdaq would be ready for the conversion to
decimals in July and August, Peterson said: "We're in the
process of testing" and declined to elaborate.
On Wednesday, the technology stock-laden Nasdaq broke
another record for trading volume with more than 2.2 billion
shares changing hands. The year-to-date average daily share
volume is about 1.72 billion shares.
By comparison, the New York Stock Exchange has had an
average of roughly one billion shares traded daily and the GAO
said the biggest U.S. market appears to be less of a risk for
successfully handling decimal trading by 2001.
On Nasdaq, with decimal trading of stocks for a penny,
message traffic could rise as much as 700 percent by December
2001, according to the study conducted by SRI Consulting and
commissioned by the securities industry trade group.
The study also noted that even without decimals, the peak
message traffic for Nasdaq stocks could be 174 percent higher.
Nasdaq's Peterson said that message traffic at the market
had increased four-fold the last two years and in the last nine
months had risen two-and-a-half-fold.
In January, the Securities and Exchange Commission ordered
U.S. securities markets to begin quoting stock and option prices
in nickels beginning July 3 in a move to boost competition and
give investors the best possible price.
After a month, all stocks would be quoted in nickels and a
pilot project would be conducted in which a few stocks would be
quoted in pennies to assess the impact.
Nasdaq is not alone in having systems 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 markets, will also face a tough
challenge dealing with the rise in message traffic.
The SRI Consulting study projected that options trading in
decimals could lead to a 3,000 percent increase in peak message
traffic by December 2001 and even if decimals were not
introduced, message traffic would rise 779 percent.
While the progression from fractions to decimals will be
staggered, many members of Congress on the panel expressed
concern the process was moving too quickly for the industry.
"Due to increased quote traffic that is bound to occur with
decimalization, I am concerned about whether or not there is
enough capacity in our trading system to handle the new flow of
information," said Rep. Edolphus Towns, a New York Democrat and
ranking member on the panel.
The switch to trading in pennies and nickels will likely
create a one-time cost to the industry of about $907 million and
save investors anywhere from $300 million to almost $2 billion
annually, GAO's D'Agostino said.