March 2, 2000
Mr. Alfred R. Berkeley III Dear Mr. Berkeley: Yesterday the Subcommittee on Finance and Hazardous Materials held a hearing on the General Accounting Office’s (GAO) assessment of the securities industry’s progress toward implementing decimal trading. A copy of GAO’s written statement is enclosed. The testimony’s general conclusion is: "Although securities market participants have made progress in preparing for decimal trading, some key challenges remain for the industry to successfully implement decimal trading. ... The options markets and the Nasdaq Stock Market, Inc. (Nasdaq) face the greatest difficulty in preparing for the increased message traffic from decimal trading." (GAO testimony p. 1.) With respect to Nasdaq, the GAO testimony raises serious doubts that Nasdaq will have sufficient capacity to absorb the increases in quotation message traffic expected to result from decimal trading. (GAO testimony p. 9.) According to GAO, the latest projections indicate that trading in penny minimum price variations may increase Nasdaq quotation message traffic by 700 percent between December 1998 and December 2001. Nasdaq officials informed GAO that Nasdaq is already experiencing processing strains because of unprecedented increases in trading volumes. For example, average daily share volume since the beginning of 2000 is almost 1.7 billion shares, which represents a 61 percent increase over average daily volume in 1999. GAO also notes the troubling fact that Nasdaq has not factored into its planning the latest increased message traffic projections, and further that Nasdaq officials have informed SEC that Nasdaq will not be ready until the first quarter of 2001 to accommodate Nasdaq’s own lower estimates. Finally, GAO reports that Nasdaq will not be able to participate in the first two industry wide decimal trading tests scheduled for April and May 2000. A June test has been added to the schedule for Nasdaq; Nasdaq does intend to participate in that test. Please provide your response to this GAO report for the record by the close of business on Friday, March 31, 2000. Please indicate whether this bleak picture is accurate, and, if so, what steps you are taking or intend to take to ameliorate it. Given the significance of your market, what impact will its absence have on the credibility of the April and May 2000 "industrywide" tests? Can the industry proceed with decimal trading on the current schedule if you are not ready? If so, what will be the effect on Nasdaq systems and on investors? How have your current "processing strains" evidenced themselves? What has been their effect on the operation of your market and investors? Have they been reported to the SEC? What steps are you taking or do you intend to take to address these problems? Thank you for your cooperation and attention to this request. Sincerely, JOHN D. DINGELL Enclosure cc: The Honorable Michael Oxley
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