MONEY MATTERS; VENDORS COULD LOSE ON SMALLER SPREAD.

Byline: Philip Boroff Bloomberg News

Wall Street's vendors could lose as much as $3 billion a year as the U.S. securities industry adopts new procedures designed to make trading less expensive for investors.

``Trading is a zero sum game,'' said Samuel Hayes, a professor at Harvard Business School. ``The winners are the investors. The losers are the vendors.''

The vendors are specialists and market makers, the middlemen who can profit from the difference or spread between the price at which stocks are bought and sold. Since the 18th century, stocks traditionally have been traded in increments of eighths of a dollar, meaning there is a 12.5-cent difference between the best-priced bid for stock and the lowest offer to sell.

That convention is endangered. The American Stock Exchange started trading Wednesday in increments of sixteenths of a dollar, or 6.25 cents. Representatives of all the nation's major stock exchanges will meet next week to consider a computer upgrade that would allow minimum stock quotes as fine as one sixty-fourth of a dollar, or 1.6 cents.

Academics, regulators and exchange officials expect spreads to narrow, to the benefit of institutional and individual investors.

``Savings (for investors) could be as much as $3 billion,'' said Junius Peake, a professor of finance at the University of Northern Colorado. Peake estimates that investors may save an average of 1 cent on every share traded. About 264 billion shares were traded in 1996.

These changes come as Congress and the Securities and Exchange Commission apply pressure on Wall Street to narrow spreads. The House of Representatives is considering a bill requiring U.S. markets to move to decimal pricing, with penny increments. Markets outside the United States trade in decimals.

Instituting 1.6-cent fractions would reduce pressure for penny increments. It also would be easier to implement because exchanges can adopt new pricing procedures with fewer computer changes.

Bernard L. Madoff Investment Securities accelerated the shift last week by announcing plans to post prices for shares listed on the New York Stock Exchange in increments of one-sixteenth. Madoff is the largest arranger of trades for brokerage firms outside traditional exchanges, handling 10 percent of the transactions in NYSE stocks.

The Pacific Exchange in San Francisco also made a proposal to the SEC to trade in sixteenths. Two other regional exchanges, the Boston and Chicago stock markets, have been talking to the SEC about similar proposals, an SEC spokesman said.

The Philadelphia Stock Exchange began trading Amex-listed shares Wednesday in sixteenths.