Brother, can you spare a decimal point?

They want the Securities and Exchange Commission to permit firms to set minimum profit margins on trading stocks to restore margins squeezed when stocks began trading in dollars and cents instead of fractions. The switch to decimals, along with the bear market, has depressed Wall Street's profits. Although the firms' effort is showing early signs of success, experts say it faces significant hurdles. Not only does the push amount to getting a government fiat to fix prices, it would also be seen as hurting investors, who have benefited from the switch to decimals. Government assistance is the last thing Wall Street deserves, some observers say, particularly since its crusade comes just weeks after the largest firms agreed to pay $1.4 billion to settle charges that their stock analysts misled investors with tainted research. "You can't do something that's anti-consumer so Wall Street can make more money," says Reilly Tierney, a securities industry analyst at brokerage firm Fox-Pitt Kelton Inc. Even so, people in some high places are lending a sympathetic ear to Wall Street's campaign, which so far consists of a letter to the SEC and informal talks with regulators.

Gaining Momentum

SEC chairman William H. Donaldson recently said the practice of quoting stocks in decimals "needs to be looked at." Richard Grasso, chairman and chief executive of the New York Stock Exchange, agreed. Allowing firms to set prices for trading stocks would require agreement by the Big Board and The Nasdaq Stock Market Inc., as well as SEC approval. The spread, which is the amount trading firms make when they connect buyers and sellers, collapsed when stocks began trading in decimals three years ago. The previous system, quoting stocks in fractions, meant the narrowest spread could be one-sixteenth of a dollar, or 6.25 cents. When stock prices are quoted in decimals, the spread can fall to as low as a penny. John Giesea, president of the Security Traders Association, says his New York trade group wants the government to allow a minimum 5-cent spread. Trading stocks is a huge business for many prominent Wall Street firms, including The Goldman Sachs Group Inc., Morgan Stanley and Smith Barney Inc., which make markets in thousands of stocks every day. While the bear market's decline in volume is part of the problem, the damage done by the drop in spreads can best be seen at Knight Trading Group Inc., the leading market maker of Nasdaq stocks. Revenue at the Jersey City, N.J., firm has dropped more than 50% from its peak in 2000 of $1.3 billion, and it reported a loss last year of $43 million, compared with its record profit in 2000 of $260 million. Knight Trading has also shed 30% of its work force, according to AutEx/ Blockdata, a Boston market tracker. Merrill Lynch & Co. Inc. of New York, which boosted its trading business in 2000 by paying more than $900 million to acquire Jersey City-based Herzog Heine Geduld Inc., last year slashed operations . It now trades 60% fewer Nasdaq stocks than just after the acquisition. While traders grouse about the havoc caused by trading stocks in decimals - and there is some evidence that quoting stocks in decimals has raised trading costs for big investors such as mutual funds - the switch has benefited individual investors. The average spread for shares on the Nasdaq was 3 cents in October, according to the most recent Nasdaq data, down from as high as 29 cents in 2000, the year before all stocks switched to decimals. A spread of 29 cents means that buyers pay $290 more to acquire 1,000 shares than the seller receives. The difference goes to the Wall Street middleman, who is also likely to charge a commission, while pocketing the spread. Steven Wallman, a former SEC commissioner, says any move to fix prices would be detrimental to investors. "It's surprising that suggesting that the government should permit or mandate minimum spreads, which would limit competition and harm smaller investors, would be considered a good thing," Mr. Wallman says.