DECIMAL PRICING TECHNIQUES BASIC INFORMATION AND TUTORIALS


What Is Decimal Pricing?

Common stocks in the United States have always been quoted in fractions prior to the change in late 2000. Specifically, prior to 1997, they were quoted in eighths (e.g., 1/8, 2/8, . . . 7/8), with each eighth equal to $0.125.

This was modified in 1997 when the fractions for most stocks went to sixteenths (e.g., 1/16, 2/16, . . .15/16) equal to $0.0625. The Securities and Exchange Commission (SEC) has been pushing for a change to decimal pricing for a number of years and eventually set a deadline for the early part of 2001.

The NYSE started the transition with seven stocks as of August 28, 2000, included an additional 52 stocks on September 25, and added 94 securities effective December 4, 2000. The final deadline for all stocks on the NYSE and the AMEX to go “decimal” was April 9, 2001.

The Nasdaq market deferred the change until late April 2001.

The espoused reasons for the change to decimal pricing were threefold. The first reason was the ease with which investors could understand the prices and compare them.

Second, decimal pricing was expected to save investors money since it would almost certainly reduce the size of the bid-ask spread from a minimum of 6.25 cents when prices are quoted in 16ths to possibly 1 cent when prices are in decimals.

Of course, this is also why many brokers and investment firms were against the change since the bid ask spread is the price of liquidity for the investor and the compensation to the dealer.

Third, this change is also expected to make the U.S. Markets more competitive on a global basis since other countries already price on a comparable basis and, as noted, this would cause our transaction costs to be lower.

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