The Treasury's proposed decimalization of coupons is raising concerns the switch will hamper the day-to-day mechanics of trading. Some dealers also fear trading profits will shrink, forcing firms out of business in a market that many feel will go through the sweeping changes ushered in by a similar move at the New York Stock Exchange in 2001. But others are taking a more sanguine view and see the current market as being competitive enough where profits are so tight there isn't room for fat trimming.
The Treasury recently proposed decimalizing coupons in 0.001% increments to bring sales closer to par at auction and reduce the risk of unintended reopening--where a new issuance has the same maturity and coupon as an existing issuance, and thus is given the same CUSIP number--which are seen as lowering demand. The proposal was one discussion topic for the Treasury's quarterly meeting with its primary dealers last week.
In the case of the NYSE, the change to decimalization drastically cut profit margins, which led some firms to go bankrupt and pushed firms to electronic trading. While the smaller increments could theoretically cut down dealer profits, most discounted this effect in an already competitive market. "The two-year can trade at 1/128; I don't see the decimalization will affect it that much," said Gerald Lucas, chief Treasury and agency strategist at Banc of America Securities.
However, most market professionals did agree it would make trading more cumbersome. Prices on broker screens are currently quoted in fractions. If the Treasury implements its proposed changes, prices would be quoted as decimals, which traders said would add an extra level of complexity to trading. "It's easier to eyeball eighths," said Rahmaan Streater, Treasury trader at HSBC Securities. He added dealer systems would have to be updated to accommodate decimals.
While The Bond Market Association has not studied the issue in depth, changing the trading dynamic could create friction and introduce errors, according to Eric Foster, v.p. and principal staff advisor to TBMA's government and federal agency securities divisions. "Trading nomenclature has worked very well, and with this change you could see inquiries come up where traders mistook issuances because the coupons are so similar," Foster noted.
Another fear is the decimalization will cut into discounts at auctions, which could scare away some investors, according to Josh Stiles, senior bond strategist at IDEAglobal. Lucas however, disagreed. "That only matters if you buy a security at auction at a discount and hold it to maturity," he said.
But, Junius Peake, widely credited as the original proponent of decimalization for stocks, saw the change as a plus for the bond market. "Everyone was screaming that it was terrible and the world would come to an end, but it didn't and actually made the markets more efficient," said Peake, who is also a professor of finance at the University of Northern Colorado.
Brookly McLaughlin, Treasury spokeswoman, declined comment.