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Decimal-ating Wall St.
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March 24, 2000: 10:12 a.m. ET
A change is coming, though the timing isn't fixed. It should be good news.
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Decimal prices for stocks are on the way for U.S. markets, and for many investors, it's about time.
"I can't wait for it to happen," said Terry Balding, a certified financial planner with Terry Balding & Associates in Sun Prairie, Wis. "The clarity should be fantastic for the investor, that's the main thing."
Actually Balding may have to wait, at least a few months. Congress first lit a fire under the industry to change from fractions to decimals in early 1997. At the start of this year, with Y2K behind it, the Securities and Exchange Commission laid down the law that U.S. markets switch by July 3.
Earlier this month, the Nasdaq stock market said it couldn't hit the deadline. The SEC pushed back the date the markets must present their conversion plan a month, to April 13. The switch itself may well get pushed back from July, too.
But those are timing issues. The gist still is that decimals are coming soon to a stock market near you. What does that mean for Main Street?
What was up with that, anyway?
In the long run, the main point is that you can forget about "teenies," and what exactly 3 divided by 8 is, and whether 5/16ths are less than 1/4. Stocks will fall in line with everything else.
Many are more than happy to give up the mental leaps (OK, be honest, frustrated fumbles for a calculator) produced by an antiquated system that dates to pieces of eight, coins that could be physically split into eight.
"You don't go to the grocery store and pay $1-3/8 for a loaf of bread, you pay $1.35," pointed out Susan Wyderko, director of the SEC's Office of Investor Education and Assistance. "It's going to be a whole load easier for investors to understand the prices they're paying."
Tighter spreads should benefit investors
Well and good -- so why hasn't this happened sooner? Most international markets already trade in decimals. Also it's, well, plain normal.
To some extent, investors didn't think to ask or worry about it too much. There's tradition involved, even perhaps a sense of snobbery. "Old traditions die hard, and it's fun to be part of an elite group that does understand teenies," Wyderko said.
But with many new investors entering the market, members of Congress started hearing that constituents would prefer decimals. Not all of Wall Street was as keen on seeing the old system die.
When trading increments get smaller, spreads, the difference between a stock's bid and asked price, tend to narrow. So switching to smaller increments, which decimals involve, would tighten spreads. That cuts profits for middlemen such as market makers. It leads to greater efficiency and better prices for investors.
The theory is that when increments are high -- say, you can only change your price $1 at a time -- you are less inclined to improve your price often. But if you can change your price at less dramatic levels -- say every 5 cents -- you are more willing to cut your best price, and change your price more often, to stay competitive.
Other benefits for investors, too
"It's going to be easier for individuals to get in and out of stocks," said Aaron Harkavy, a certified financial planner with Lincoln Financial Advisors in Rosemont, Ill. "I think investors do notice when there is a large spread and may be reluctant to dive right in."
He thinks liquidity, the ease and volume of shares changing hands, will also improve because it will be easier for investors to find acceptable prices.
Decimal trading may also make the concept of paying a spread easier to understand. With trading in fractions, the spread is not as obvious as it will be in decimals, investment advisers say. Fractions don't always translate to money in people's heads.
"If you tell investors a stock is trading at 20-1/2 to 20-5/8, OK, it is," Balding said. "There's no real comprehension of what that is or why that is." But tell someone they can buy at $20.50 and sell at $20.65 and they'll get it, he said.
Nickel ticks to come first
Though the final plan has to be submitted to and accepted by the SEC, the Securities Industry Association expects a test run of 30 or 40 stocks, trading with a 5 cent MPV, or minimum price variation. In other words, the smallest "tick size," or change in the quote, would be a nickel.
The minimum tick size on most markets has been a teenie, or 1/16, since the New York Stock Exchange reduced its MPV from 1/8 in June 1997. That was the first change in the history of the NYSE and followed the lead of other markets. On Nasdaq, market makers can quote in smaller tick sizes.
A change from 1/16 to a nickel means the smallest generally accepted increment will drop from 6.25 cents -- yes, that's what a teenie is worth -- to 5 cents. When it comes time to sell shares bought in fractions, there's no change -- investors work out their basis for shares bought in fractions by converting to dollars (including commissions) anyway.
Limit orders rounded to investors' benefit
Any limit orders "waiting" for a certain price and still on the books will be construed in the investor's favor, says John Panchery, the SIA's project manager on decimalization.
A buy limit order would be rounded down. If an order were on the books to buy 100 shares of XYZ at 35-1/16, or $35.0625 in decimals, it would be executed if the price hit $35.05.
A sell limit order would be rounded up. If an order were on the books to sell 100 shares of XYZ at 35-1/16, it would be executed if they price hit $35.10.
Investors could cancel their standing orders, too, as they can now.
Penny pricing possible
If all goes well, all stocks will switch to nickels. A pilot would also start for some stocks to trade with penny increments.
The first draft of the SIA conversion plan suggested markets could then file the MPV they prefer. The plan isn't fixed -- some stocks that trade at tick sizes of 1/32 or lower might switch straight to trading in pennies, Panchery said.
And the shift to trading in pennies isn't set. The Toronto Stock Exchange converted to nickel increments in April 1996 but has continued to use a nickel MPV.
What are the downsides?
It's not certain penny ticks would make trading simpler. As increments get smaller, traders have to change their quotes more frequently. The volume of quote traffic to quote vendors picks up, as does the number of trades placed. All those costs trickle down.
But trading volume doesn't necessarily increase correspondingly. An SIA study showed switching to pennies would produce a nine percent increase in volume but lead to a 139 increase in quotes.
An NYSE study showed moving from 1/8 to 1/16 benefited individual investors trading in the most popular stocks. But it had little effect on infrequently traded stocks. The depth of the market -- the number of shares actually at the bid or ask price -- decreased with smaller increments.
Investors could suffer if spreads dropped and many market makers went out of business, Harkavy pointed out. Market makers provide liquidity, the oil in the market. More stocks would trade with fewer market makers.
Balding can imagine another downside. Though most individual investors don't get too caught up over whether a stock is now trading at 4-3/32 versus 4-5/32, he prays investors don't get too obsessed with small changes in price.
"It's bad enough where someone is buying at eighths," he said. "If someone is holding out for $4.10 vs. $4.11, that's nuts." He has had clients hold out for small fractional moves for three months or more and cautions against missing opportunities as a result.
Otherwise, most investment-world figures construe decimal pricing as wholeheartedly good for investors, though the investment world itself must work through its teething pains.
"I'm personally looking forward to it," Harkavy said. "It's simpler, and it's going to have a very positive effect for all investors." 
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