Securities Pricing:

Actions Needed for Conversion to Decimals

T-GGD-98-121: Published: May 8, 1998. Publicly Released: May 8, 1998.

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Thomas J. McCool
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GAO discussed the results of its assessment of the securities industry's readiness to trade stock using decimal prices.

GAO noted that: (1) in 1997, the House Subcommittee on Finance and Hazardous Materials held hearings on proposed legislation that would have directed the Securities and Exchange Commission (SEC) to require that securities be traded using dollars and cents instead of the traditional fractions within 1 year of enactment of the legislation; (2) after industry representatives indicated that they were committed to converting to decimals, Congress took no further action on the legislation; (3) industry progress since the hearings has generally been limited; (4) officials of most of these organizations estimated that the cost to convert their systems for decimal trading would be much less than the cost for information technology efforts, such as the year 2000 conversion; (5) they also estimated that it would take less than 6 months to convert to decimals, but they did not expect to complete the conversion until after year 2000 changes have been tested and implemented; (6) an industry study showed that the securities industry was dedicating most of its available information technology resources and time to readying its systems for the impending date change in 2000, the introduction of a single currency in Europe in January 1999, and other information technology initiatives; (7) in particular, industry officials said the time required to test and resolve any year 2000 problems leaves little time for conducting the industrywide testing necessary for a conversion to decimal trading; (8) GAO's work reviewing the year 2000 efforts of numerous federal agencies and other entities has generally found that organizations are avoiding the simultaneous implementation and testing of multiple major systems changes to mitigate the risk of inadvertent malfunctions; (9) ensuring 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; and (10) however, GAO is recommending several actions that are needed to ensure that decimal trading is implemented as soon as possible after January 1, 2000.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In letters to Congress and GAO responding to the recommendations, SEC agreed to monitor the progress of the securities industry toward implementing decimal trading. To facilitate the development of the plan, SEC directed the NYSE to convene a small working group of equity and derivatives markets participants. The group is composed of representatives of SROs and securities firms. This group has developed a set of preliminary technical standards for decimal trading and a proposed testing and implementation schedule.

    Recommendation: To help ensure a successful implementation of decimal trading in U.S. equities markets as soon as possible after January 1, 2000, the Chairman, SEC, should ensure that market participants develop a comprehensive plan for implementing decimal trading. Such a plan should: (1) establish interim milestones, including those associated with streetwide testing; (2) set an implementation target date; and (3) delineate technical standards and specifications that receive broad industry support. Although the Securities Industry Association has agreed to oversee and manage the project as it has done for year 2000, SEC should monitor the plan's implementation.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: In its letters to the various congressional committees and GAO, SEC noted that the Securities Industry Association and the New York Stock Exchange are organizing an industrywide capacity study to determine if decimal trading will require additional systems capacity, and SEC has agreed to monitor the progress of this effort. SEC has also directed the self-regulatory organizations to conduct a review of the rules affected by decimal trading and to report their findings by October 1998.

    Recommendation: To help ensure a successful implementation of decimal trading in U.S. equities markets as soon as possible after January 1, 2000, the Chairman, SEC, should ensure that an assessment is conducted of the potential impact of decimal trading on the: (1) industry's processing and communication capacity; and (2) functioning of market regulations and exchange rules so that any necessary changes can be made and a smooth transition to decimal trading can occur.

    Agency Affected: United States Securities and Exchange Commission


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