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Testimony: 

Before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10: 00 a.m. EDT: 

Thursday, July 22, 2004: 

Securities Markets: 

Preliminary Observations on the Use of Subpenny Pricing: 

Statement of Davi M. D'Agostino, Director, Financial Markets and 
Community Investment: 

GAO-04-968T: 

GAO Highlights: 

Highlights of GAO-04-968T, a report to Committee on Banking, Housing, 
and Urban Affairs 

Why GAO Did This Study: 

In 2001, U.S. stock and options markets, which had previously quoted 
prices in fractions, began quoting in decimals. Since then, various 
positive and negative effects have been attributed to the transition to 
decimal pricing. As part of this transition, the major stock markets 
chose one penny ($.01) as the minimum price variation for quoting 
prices for orders to buy or sell. However, some electronic trading 
systems allowed their customers to quote in increments of less than a 
penny (such as $.001). The use of subpenny prices for securities 
trades has proved controversial and the Securities and Exchange 
Commission (SEC) has proposed a ban against subpenny quoting for stocks 
priced above one dollar across all U.S. markets. 

As part of ongoing work that examines a range of issues relating to 
decimal pricing, GAO reviewed (1) how widely subpenny prices are used 
and by whom, (2) the advantages and disadvantages of subpenny pricing 
cited by market participants, and (3) market participants’ reactions to 
SEC’s proposed ban. 

What GAO Found: 

Data on the extent to which market participants are quoting in subpenny 
increments across all U.S. equity markets are not routinely reported or 
readily available. However, studies of limited scope conducted by 
regulators and one market found that subpenny prices were not widely 
used. For example, a study done by the Nasdaq Stock Market in 2001 of 
Nasdaq stocks found that subpenny increments were used in less than 15 
percent of the orders that specified a price (limit orders). 
Currently, the major markets do not allow subpenny quoting but a few 
electronic trading systems that match customer orders do. 

On electronic trading systems, professional traders (such as those 
employed by hedge funds) use subpenny quotes to gain a competitive 
price advantage over other orders. However, many market participants 
GAO interviewed cited numerous disadvantages to the use of subpenny 
quoting. They argued that subpenny quotes primarily benefit the 
professional traders who subscribe to market data systems displaying 
subpenny prices and who use fast systems to transmit their orders to 
take advantage of such prices. As a result, most investors do not 
benefit from subpenny quotes because they do not use these systems and 
because many broker-dealers do not accept orders from their customers 
in subpenny increments. In addition, participants said that subpenny 
quotes allow some traders to step ahead of others’ orders for an 
economically insignificant amount. They said this discourages other 
traders from submitting limit orders and reduces overall transparency 
and liquidity in the markets. 

Based on the work GAO has conducted to date, including a limited review 
of comments on SEC’s proposal to ban subpenny quoting, most market 
participants support SEC’s proposed action. However, some 
organizations opposed to the ban said that it could reduce the ability 
of traders to offer better prices and stifle technological innovation 
and reduce market participants’ incentive to invest in better systems. 
Although some electronic trading systems supported the ban, others 
indicated that the decision to use subpenny quotes should be left to 
market participants who, as technology advances, may increasingly find 
subpenny quotes more useful than they do today. 

In addition to reviewing subpenny pricing, GAO continues to review the 
broader impacts of decimal pricing on markets, securities firms, and 
investors. As part of this work, we plan to conduct original analysis 
using a comprehensive database of trades and quotes from U.S. markets 
to identify trends in quoted spreads, clustering of quotes and trades 
across certain prices, and other potential changes since decimal 
pricing was introduced. 

www.gao.gov/cgi-bin/getrpt?GAO-04-968T.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Davi D'Agostino at (202) 
512-8678 or dagostinod@gao.gov.

[End of section]

Mr. Chairman and Members of the Committee: 

It is a pleasure to be here today to participate in this important 
hearing on market structure issues. As you requested, my statement 
today will focus on the use of subpenny quotes in the securities 
markets. I also will describe the work we are conducting for this 
Committee's Subcommittee on Securities and Investment as part of our 
ongoing broader study of the impact of decimal pricing on the 
securities markets, firms, and investors.

Many changes have occurred since the U.S. markets transitioned from 
pricing stocks and options in fractions of a dollar to using decimal 
prices. Many participants cite decimal pricing as providing benefits to 
small investors, but others argue that it has contributed to lower 
liquidity and reduced the willingness and ability of securities firms 
to execute their customers' orders. As part of the transition to 
decimal prices, the major stock markets chose one penny as the minimum 
price variation (MPV), which is the minimum increment in which the 
prices of stocks on these markets are allowed to be quoted. However, 
some electronic trading systems allow their customers to quote in 
increments of less than a penny. The use of subpenny prices for stock 
trades has proven controversial, and the Securities and Exchange 
Commission (SEC) has proposed a ban against subpenny quoting for stocks 
priced above one dollar across all U.S. markets.[Footnote 1]

Today, I will discuss the preliminary results of our review of subpenny 
pricing issues, including: 

* how widely subpenny pricing is used and who uses it,

* the advantages and disadvantages of subpenny pricing, as reported by 
market participants, and: 

* the reactions of market participants to SEC's proposed ban on 
subpenny quoting.

To address these issues, we interviewed a variety of market 
participants, including regulators, markets, electronic trading 
systems, broker-dealers, industry associations, trade analysis firms, 
and institutional investors. We also reviewed relevant studies, 
testimonies, and comment letters on SEC's regulatory proposal. Our work 
is ongoing, and we expect to report on the broader range of decimal 
pricing issues later this year.

In summary: 

Although data on the extent to which market participants are quoting in 
subpenny increments are not routinely reported or readily available, 
the use of subpenny quotes in U.S. equity markets appears to be 
limited. Currently, the major markets do not allow subpenny quoting but 
a few electronic trading systems that match customer orders do. 
Professional traders using those electronic trading systems have used 
subpenny quotes to gain a competitive price advantage over other 
orders. The general investing public does not use such systems and can 
usually see prices only in penny increments.

Although some market participants saw benefits to subpenny pricing, 
most cited various disadvantages to the use of subpenny quotes. The 
advantages market participants cited included gaining order priority, 
price improvement, and more competitive and efficient markets. However, 
other market participants cited disadvantages. For example, subpenny 
quotes primarily benefit professional traders who subscribe to market 
data systems displaying subpenny prices and who use fast order routing 
systems to access prices. These prices are usually not available to the 
general investing public. In addition, market participants noted 
subpenny quotes allow some traders to step ahead of others' orders for 
an economically insignificant amount. Finally, they argued that this 
stepping ahead discourages other traders from submitting limit orders, 
which reduces overall transparency and liquidity in the 
markets.[Footnote 2]

Based on the work we have conducted to date and a limited review of 
some of the comments on SEC's proposal to ban subpenny quoting, most 
market participants appear to support SEC's proposed action. However, 
some organizations opposed to the ban said that it could reduce the 
ability of traders to offer better prices and stifle technological 
innovation and reduce market participants' incentive to invest in 
better systems. Although some electronic trading systems supported the 
ban, other electronic trading systems indicated that the decision to 
use subpenny quotes should be left to market participants who, as 
technology advances, may increasingly find subpenny quotes more useful 
than they do today. We are also continuing to review the broader 
impacts of decimal pricing on markets, securities firms, and investors. 
As part of this work, we also plan to conduct original analysis using a 
database of trades and quotes occurring on U.S. markets to identify 
trends in quoted spreads, clustering of quotes and trades across 
certain prices, and other potential changes since decimal pricing was 
introduced.

Background: 

In 2000, in response to calls from Congress, SEC directed U.S. stock 
and options markets to change from quoting equity securities and 
options in fractions of a dollar, such as 1/16th, to quoting in 
decimals. Proponents of this change believed decimal pricing would make 
stock prices easier for investors to understand, align U.S. markets 
with other major stock markets of the world, and lower investors' 
trading costs by narrowing spreads to as little as one penny.[Footnote 
3] At the time of SEC's order, U.S. markets were the only major 
securities markets in the world still trading in fractions. After a 
phase-in period of several months, the major exchanges and Nasdaq began 
using decimal pricing for all quotes on equity securities and options 
on April 9, 2001. The national securities markets, including the New 
York Stock Exchange (NYSE) and Nasdaq, chose to allow quoting on their 
markets with an MPV, or tick size, of one penny. The MPV is the minimum 
increment in which stock prices on these markets are allowed to be 
quoted.[Footnote 4] However, even before the transition to decimal 
pricing, some stocks were trading in increments of less than the MPV, 
such as 1/256th of a dollar.

Professional Traders on Electronic Markets Are the Primary Users of 
Subpenny Quotations: 

Since U.S. markets converted to decimal pricing, professional traders 
trading outside the national securities markets have been the primary 
users of subpenny prices. Although the national securities markets set 
their MPVs at one penny, several electronic trading systemsæknown as 
electronic communication networks (ECNs)ædisplay quotes and execute 
orders entered by their customers in subpennies and allow traders to 
quote prices and trade in subpenny increments.[Footnote 5] When quotes 
from these proprietary systems are displayed to traders outside the 
proprietary systems, the quotes are rounded to the nearest full penny 
increment--specifically, down for buy orders and up for sell orders--to 
comply with the required one-penny MPV of the national securities 
markets. In such instances, orders executed against these quotes 
receive the subpenny price. According to SEC staff and others, although 
several ECNs initially allowed quoting in subpennies, some have 
curtailed the use of such quotes. At the time we prepared this 
statement, we were aware of only two ECNs that allowed quoting in 
subpennies--Instinet's INET and Brut ECN--for a few selected stocks.

The extent to which stocks are quoted in subpenny increments appears to 
be limited. According to SEC staff, data on the extent to which 
subpenny increments are used to quote securities across all U.S. equity 
markets are not routinely reported or readily available. However, a 
2001 Nasdaq report to SEC that reviewed trading in stocks listed on its 
market showed that less than 15 percent of limit orders were submitted 
in subpennies after decimals were introduced.[Footnote 6] A vast 
majority of the subpenny limit orders cited in the 2001 Nasdaq report 
were handled by a single ECN. SEC staff also conducted a study of the 
use of subpennies in trading that took place between April 21 and 25, 
2003, and found that subpenny trades accounted for about 13 percent of 
trades in Nasdaq stocks, 10 percent of trades in American Stock 
Exchange stocks, and 1 percent of the trades in NYSE stocks. These 
trade execution data, however, do not directly demonstrate the extent 
of subpenny quoting, because trades may be executed using the subpenny 
increment for other reasons. For example, some institutional investors 
may ask their broker-dealers to execute orders at the weighted average 
price at which a stock traded on a particular day. This weighted 
average price can be carried out to several decimal places.

Representatives of one ECN told us that it allowed traders to quote 
certain stocks in subpennies because its customers wanted to be able to 
quote in these increments. They also said that this use of subpenny 
quotes was a way to differentiate their business from that of their 
competitors. In addition, these ECN representatives said that subpenny 
quoting enhanced the efficiency of trading in certain actively traded 
securities, such as the Nasdaq 100 Index Tracking Stock (QQQ). 
According to SEC staff and market participants with whom we spoke, 
subpenny quotes are used primarily by professional traders, such as day 
traders or traders for hedge funds, to gain a competitive price 
advantage over other traders.[Footnote 7] However, some ECNs that were 
allowing their customers to use subpenny quoting more widely have 
significantly curtailed the number of stocks that could be quoted in 
subpennies. According to a representative at one ECN, its share of the 
total trading volumes of these stocks increased rather than declined 
after it stopped quoting in subpennies.

Market Participants Cited Advantages and Disadvantages to Subpenny 
Pricing: 

Although some market participants saw benefits to subpenny pricing, 
most cited various disadvantages to the use of subpenny quotes. Some 
market participants said subpenny quoting allowed traders to raise the 
priority of their orders. For example, a representative of one ECN told 
us that when a large number of traders were all quoting the same full 
penny price, one trader could increase the chances of executing a trade 
by improving the price by a subpenny increment. This representative 
also said that the customers on the other side of the trade also 
benefited from the subpenny increment, as their orders were executed at 
slightly better prices. ECNs we contacted also told us that subpenny 
pricing allowed for more efficient and competitive markets. For 
example, a one-cent MPV could act as an artificial constraint on 
pricing for stocks that trade actively. According to representatives of 
one ECN, allowing such actively traded stocks to trade in increments of 
less than a penny allows buyers and sellers to discover a stock's true 
market price.

However, most of the market participants we contacted mainly cited 
disadvantages to subpenny quoting. First, many participants told us 
that the benefits of subpenny pricing accrue to professional traders 
but not to the general investing public. Representatives of one firm 
with whom we spoke told us that quotes in subpenny increments were 
available to professional traders who pay to access proprietary trading 
systems the ECNs operate. Through these proprietary systems, 
professional traders can use fast order routing systems to obtain the 
subpenny prices, which may be better than those that are publicly 
displayed on other markets that use one-cent MPVs. According to market 
participants, many broker-dealers do not accept orders from their 
customers in subpenny increments, and so the average investor generally 
cannot access the subpenny quotes. A representative of a large broker-
dealer stated at an April 2004 SEC hearing that his firm had stopped 
allowing clients to submit orders priced in subpenny increments for 
this reason. Further, representatives at one securities market argued 
that the integrity of the securities markets was reduced when some 
traders have advantages over others.

Many of the market participants we contacted told us that quoting in 
subpenny increments also resulted in more instances of traders 
"stepping ahead" of large limit orders. According to some market 
participants, reduced MPVs that accompanied decimal pricing have 
negatively affected traders displaying large orders at one price. These 
traders find that their orders go unexecuted or have to be resubmitted 
when other traders step ahead of them by quoting a better price in 
increasingly small amounts. These participants argued that at higher 
MPVs, which were previously 1/8th or 1/16th of a dollar per share, 
traders stepping ahead of other orders were taking a greater financial 
risk if their orders were executed and prices then moved against them. 
However, market participants with whom we spoke said subpenny 
increments were generally an economically insignificant amount and that 
traders using them faced much lower financial risk. Recent SEC and 
Nasdaq studies of subpenny trading found that most trades executed in 
subpenny increments clustered at prices 1/10th of a cent above and 
below the next full penny increment, suggesting that subpenny quotes 
were primarily being used to gain priority over other orders and were 
not otherwise the result of natural trading activities. Market 
participants also told us that the more likely it is that a trader can 
step ahead of other orders--as they can by using subpenny quotes--the 
less likely traders are to enter their limit orders, which are an 
important source of liquidity. This reduced incentive to enter limit 
orders also reduces the number of shares displayed for sale and 
potentially affects liquidity and market efficiency.

Furthermore, some market participants also saw subpenny quoting as 
reducing market transparency for retail investors and depth for 
institutional investors. When the MPV decreases, for example to 
subpennies, the number of potential prices at which shares can be 
quoted--called price points--increases, because displayed liquidity is 
spread over more price points. For example, subpenny quotes using 1/
10th of a penny ($.001) increase the number of price points to 1,000 
per dollar. This affects retail investors, because fewer shares are 
generally quoted at the only prices visible to them--the current best 
prices for purchase or sale. This affects institutional investors, 
because the more price points that must be considered, the more 
difficult it becomes to determine whether sufficient shares are 
available to fill larger orders. Market participants said that quotes 
in a subpenny pricing environment change more rapidly (a phenomenon 
known as quote flickering) and make determining the actual prices at 
which shares are available more difficult. Quote flickering reduces 
broker-dealers' ability to determine whether the trades they have 
conducted satisfy their regulatory responsibility to obtain the best 
execution price for their clients. Finally, some market participants 
told us that subpenny pricing has the potential to greatly increase the 
processing and transmission capacity requirements for the market data 
systems that transmit price and trade information, causing firms to 
expend resources to redesign electronic systems.

SEC's Proposal to Ban Subpenny Quoting Appears to Have Widespread 
Support: 

SEC's proposed rule to prohibit market participants from pricing stocks 
in increments of less than one penny appears to be widely supported. As 
part of its proposed rule changes to Regulation NMS, SEC has proposed 
establishing a uniform pricing standard for stocks that trade in all 
market centers, which SEC defines as exchanges, over-the-counter market 
makers, specialists, and ECNs. Specifically, SEC proposes to prohibit 
market participants from accepting, ranking, or displaying orders, 
quotes, or indications of interest in a pricing increment finer than a 
penny in any stock, unless the stock has a share price of less than one 
dollar. The proposed rule would not prohibit executing trades in 
increments of less than one penny, which most markets currently permit, 
because there are instances when subpenny trading is appropriate--for 
example, when the trade's price is based on some averaging mechanism. 
According to SEC staff, this change would address differences in 
pricing that exist across markets and that benefit some investors at 
the expense of the general investing public. According to the staff, 
banning subpenny pricing should also reduce the extent to which limit 
orders lose priority because of subpenny pricing, thereby preserving 
incentives to display limit orders, which are an important source of 
liquidity for the markets.

Most market participants we have contacted to date and most commenting 
on SEC's proposal appear to support a ban on subpenny pricing for 
stocks priced at more than one dollar. Of the over 500 comment letters 
available on SEC's Web site as of July 16, 2004, we determined that 
about 50 provided comments on the proposed ban. Of these, 86 percent of 
the commenters supported banning subpenny quoting. According to NYSE 
and Nasdaq representatives with whom we spoke, the current existence of 
quotes that not all investors can access is a significant reason for 
their support of SEC's proposed subpenny prohibition. Nasdaq's support 
for banning subpenny quoting comes despite filing for a proposed rule 
change with SEC in 2003 that would permit Nasdaq to adopt an MPV of 1/
10th of one cent for its listed securities. According to the Nasdaq 
representatives, if SEC does not prohibit subpenny quoting, Nasdaq 
would want SEC approval to begin quoting in subpennies in order to 
compete with ECNs. Nasdaq subsequently withdrew its propsed rule 
change, presumably because SEC is proposing to ban subpennies in its 
proposed changes to Regulation NMS. Representatives at several 
institutional investors and broker-dealer firms also agreed that 
quoting in subpenny increments should be prohibited. In its June 30, 
2004, comment letter to SEC, the Investment Company Institute (which 
represents the interests of the $7 trillion mutual fund industry) 
stated that quoting in subpennies eliminates many of the benefits 
brought by decimal pricing and exacerbates many of the unintended 
consequences that have arisen in the securities markets since its 
implementation that have proven harmful to mutual funds and their 
shareholders.

However, other market participants and other commenters opposed SEC's 
proposal to ban subpenny quoting. Several of the organizations that 
opposed a ban said that subpenny quotes allow traders more ability to 
improve the prices they offer to others. A group of 10 academic 
researchers that commented to SEC argued that the impacts of subpenny 
quoting on market transparency could be resolved with technology. For 
example, data vendors can choose to update quotes only when there are 
meaningful changes. A letter from a university regulatory research 
center noted that banning subpenny quoting could stifle innovation in 
the way that quotes are displayed to investors. For example, graphical 
displays could replace flickering quotes with fluid motion and use 
patterns and shapes to help investors recognize changes. A ban could 
also reduce incentives for other market participants to invest in 
innovative technologies.

Opinions among some ECNs were mixed, with roughly an equal number 
supporting and opposing SEC's proposal to ban subpenny quoting. 
Representatives of two ECNs indicated that SEC should not enact a ban, 
arguing that tick size is best determined by demand in the marketplace. 
Furthermore, representatives of two ECNs noted that stocks that trade 
at a spread of a penny benefit from the increased efficiency afforded 
by subpenny increments; one representative noted that a penny MPV 
artificially constrains price discovery for these stocks. In addition, 
this representative said that stocks with low share prices should be 
quoted in subpenny increments because subpennies become economically 
significant when the share price is a few dollars or less. Finally, 
these representatives said that as more traders and firms upgrade their 
trading technology, they may find more advantages from quoting in 
subpennies and that a regulatory ban enacted now might become an 
unpopular constraint in the future. One of the ECNs is supporting SEC's 
proposal to ban subpenny quoting because its customers preferred not to 
have subpennies used on that ECN's system. At the time we prepared this 
statement, we had not yet talked to entities that are reported to be 
key users of subpenny quotes and who may be opposed to SEC's proposal, 
such as day traders, hedge funds, or entities whose sole business is 
computer-enabled trading.

GAO's Review of the Impacts of Decimal Pricing Is Ongoing: 

At the request of this Committee's Subcommittee on Securities and 
Investment, we are conducting additional work to review the impact of 
decimal pricing on the securities markets, securities firms, and retail 
and institutional investors. To conduct this work, we are reviewing 
relevant regulatory, academic, and industry studies that address 
decimal pricing impacts. We are also interviewing and obtaining 
information from market participants, including: 

* regulators;

* securities markets, including stock and options markets;

* ECNs;

* securities firms, including broker-dealers that conduct large-block 
trading, market makers, and exchange specialists;

* industry associations, including those representing securities 
traders, broker-dealers, and mutual funds;

* trade analysis firms;

* institutional investors, including pension and mutual fund investment 
managers; and: 

* academic researchers who have studied trading and decimal pricing.

To identify trends and changes since decimal pricing was introduced, we 
are also attempting to collect and analyze data on the characteristics 
of markets, firms, and investors and the impact of decimalization on 
these entities (table 1).

Table 1: Data Being Collected on Decimal Impact Review: 

Area affected: Markets; 
Examples of data: 
* spreads; 
* market liquidity; 
* trading volumes; 
* price volatility.

Area affected: Securities firms; 
Examples of data: 
* number of active market makers; 
* number of market makers per stock; 
* firm profitability.

Area affected: Investors; 
Examples of data: 
* trading costs.

Source: GAO.

[End of table]

In addition, we plan to conduct research and analysis using a 
comprehensive electronic database of quotes and trades that have 
occurred on U.S. stock markets. The Trade and Quote (TAQ) database 
offered by NYSE consolidates all quotes and trades that have occurred 
on NYSE, Nasdaq, the American Stock Exchange, and the regional 
exchanges. As part of this research, we plan to expand and extend 
analysis done for a recently published study on the impact of decimal 
pricing on trade execution costs and market quality, including 
volatility and liquidity.[Footnote 8]

Among the types of information we plan to analyze using this database 
are: 

* quoted spreads,

* quotation sizes (i.e., number of shares being quoted),

* the percentage of trades and shares executed at prices less or 
greater than the best quoted price prevailing at the time of 
executions, and: 

* the volatility of returns from investing.

We plan to use this analysis to shed light on how trade execution costs 
and market quality may have changed in transitioning from a fractional 
to a decimal pricing environment. In addition to the variables 
considered in the published study, we plan to gather data on trade size 
and the numbers of trades and quotes that may provide evidence on 
changes in trading behavior. We also plan to analyze the TAQ data to 
identify whether and to what extent clustering occurs when quotes or 
trade executions occur more frequently than would be expected at 
particular price points (e.g., multiples of 5 cents and 10 cents) 
despite the existence of the one-cent tick.

Observations: 

Because we are continuing to review issues relating to decimal pricing, 
we do not have definitive conclusions on subpenny pricing at this time. 
Our work to date has shown that subpenny quoting can provide advantages 
to some traders but can also create disadvantages to others and 
potentially impair incentives to display liquidity. A significant 
majority of market participants appear to support SEC's proposed ban on 
quoting in subpennies, but little information is available on the 
impact of using these quotes. On the one hand, given that such quotes 
are currently used only in a few trading venues and for a limited range 
of stocks, SEC's proposed ban would probably not result in a 
significant change for the overall markets or most investors. On the 
other hand, if SEC did not ban subpenny quotes, it is possible that 
exchanges and more markets would want to quote in subpennies--a change 
that could have a significant impact on U.S. equity markets. Still, a 
ban would take away the ability of individual markets and investors to 
choose whether to use subpenny quotes if they decide their use would be 
advantageous. Subsequent changes in market structure, technology, and 
investor needs could require SEC to reconsider whether the use of 
subpenny quotes would be appropriate at some future date.

Mr. Chairman, this concludes my prepared statement. I would be happy to 
respond to any questions that you or Members of the Committee may have.

FOOTNOTES

[1] Securities Exchange Act Release No. 49325 (February 26, 2004), 69 
FR 11126 (March 9, 2004). 

[2] A limit order is a request to buy or sell stock at a specific 
price. In contrast, a market order does not set a specific price but is 
executed at the best price quoted at the time the order is received by 
the executing market.

[3] The spread is the difference between the lowest price at which an 
investor is willing to sell stock and the highest price another 
investor will pay for it. This spread represents a trading cost to 
investors, since in a hypothetical round-trip trade in which an 
investor buys the stock and then immediately sells it, the price paid 
exceeds the price received. Narrowing the spread can lower purchase 
prices and raise sale prices, reducing trading costs. 

[4] Securities Exchange Act Release No. 46280 (July 29, 2002), 67 FR 
50739 (August 5, 2002).

[5] ECNs are a type of alternative trading system that use electronic 
systems to match their customers' orders to buy or sell securities at 
specified prices. ECNs register with SEC as broker-dealers.

[6] The Nasdaq Stock Market, Inc., Final Report to the SEC, The Impact 
of Decimalization on the Nasdaq Stock Market (New York, New York: June 
11, 2001).

[7] Day traders use a trading strategy that involves making multiple 
purchases and sales of the same securities throughout the day in an 
attempt to profit from short-term price movements via direct access to 
securities markets. Although there is no statutory definition of hedge 
funds, it is the term commonly used to describe private investment 
vehicles that often engage in active trading of various types of 
securities and commodities. 

[8] Hendrik Bessembinder, "Trade Execution Costs and Market Quality after 
Decimalization," Journal of Financial and Quantitative Analysis, vol. 
38, no. 4 (December 2003), pp. 747-77. This study looks at 300 NYSE and 
300 Nasdaq stocks from the second week of January 2001 through August 
2001. The TAQ database is a collection of intraday trades and quotes 
for all securities listed on NYSE, the American Stock Exchange and 
Nasdaq. TAQ data do not contain information on orders.

GAO Contacts and Staff Acknowledgement: 

For questions concerning this testimony, please contact Cody Goebel at 
(202) 512-8678 or goebelc@gao.gov. Other key contributors to this 
statement were Jordan Corey, Emily Chalmers, Joe Hunter, Kathryn 
Supinski, and Richard Vagnoni.

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