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.

THE ROLE OF BUSINESS ETHICS

WHAT IS BUSINESS ETHICS? WHAT IS THE ROLE OF BUSINESS ETHICS?

Business ethics are the standards of conduct or moral judgment that apply to persons engaged in commerce. Violations of these standards in finance involve a variety of actions: “creative accounting,” earnings management, misleading financial forecasts, insider trading, fraud, excessive executive compensation, options backdating, bribery, and kickbacks. 

The financial press has reported many such violations in recent years, involving such well-known companies as Apple and Bank of America. As a result, the financial community is developing and enforcing ethical standards. 

The goal of these ethical standards is to motivate business and market participants to adhere to both the letter and the spirit of laws and regulations concerned with business and professional practice. Most business leaders believe businesses actually strengthen their competitive positions by maintaining high ethical standards.

Considering Ethics

Robert A. Cooke, a noted ethicist, suggests that the following questions be used to assess the ethical viability of a proposed action.1

1. Is the action arbitrary or capricious? Does it unfairly single out an individual or group?

2. Does the action violate the moral or legal rights of any individual or group?

3. Does the action conform to accepted moral standards?

4. Are there alternative courses of action that are less likely to cause actual or potential harm?

Clearly, considering such questions before taking an action can help to ensure its ethical viability.

Today, many firms are addressing the issue of ethics by establishing corporate ethics policies. The Focus on Ethics box provides an example of ethics policies at Google. A major impetus toward the development of ethics policies has been the Sarbanes-Oxley Act of 2002.

Frequently, employees are required to sign a formal pledge to uphold the firm’s ethics policies. Such policies typically apply to employee actions in dealing with all corporate stakeholders, including the public.

Ethics and Share Price

An effective ethics program can enhance corporate value by producing a number of positive benefits. It can reduce potential litigation and judgment costs, maintain a positive corporate image, build shareholder confidence, and gain the loyalty, commitment, and respect of the firm’s stakeholders. 

Such actions, by maintaining and enhancing cash flow and reducing perceived risk, can positively

affect the firm’s share price. Ethical behavior is therefore viewed as necessary for achieving the firm’s goal of owner wealth maximization.