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RealTime IT News

Countdown to Decimalization

Today, the Big Board will be dragged kicking and screaming to initiate the first phase of a five-legged race to swap fractions for pennies in a planned rollout that will change all U.S. stocks and options trading to decimals by next year. Ironic that you learn both fractions in decimals simultaneously in grade school, but on Wall Street, the two couldn't be farther apart. The good news is, if you paid more attention to spitballs and jump rope back then, no more bothering with the calculator when you want to check the spread on your favorite stock.

Nearly all the major foreign bourses have been doing it for years, so why'd it take a new millennium to get our rears in gear? Technophobes can blame the information superhighway along with a handful of Beltway lawmakers who lobbied for the switcheroo, but the real culprit finds its roots near the tail end of the Spanish Inquisition.

Two bits, four bits, six bits, a dollar. All for decimalization, stand up and holler!

"Pieces of eight" was the name of the Spanish Empire's Eight Reales, the predecessor to the U.S. silver dollar. The Eight Reales was the most common minted coin issued by Spain's overseas colonies in the New World. Amidst coin shortages and a growing interest in localizing their currency, colonists began cutting the mother coin into eight pie-shaped wedges, counter-stamping the currency with the locality each was created in. Each slice of the pie was called a "bit," which is why a quarter dollar is often referred to as two bits; and, it's the origin of that catchy pigskin cheer that thousands of drunken students of higher learning shout during game time every fall.

Three hundred years after Columbus sailed the ocean blue, two-dozen stockbrokers slapped together the Buttonwood Agreement under a tree of the same name, marking the creation of the first stock exchange. For the next two hundred and five years, stocks would be traded in one-eighths, based on the aforementioned pie wedges. Not until 1997, did the NYSE squeeze the increments to one-sixteenths, reducing the minimum spread from 12 cents to 6 cents, and setting the first wheels in motion toward decimalization.

With a toe in the water approach, the NYSE and Amex will start a controlled rollout of just a dozen stocks that will begin trading in decimals today. Most retail investors will probably give a collective yawn to the first crew that will go under the knife, but another 52 will start trading in pennies on September 25, including the planet's largest ISP, America Online . In a show of uncharacteristic foot-dragging, the Nasdaq Stock Market has pleaded for more time to upgrade its technology and won't be compliant until tax-time 2001.

There's a reason for some resistance to decimalization by broker dealers who pad their pockets with the difference between a stock's bid and ask price. Currently, six cents is the smallest spread, but soon, the minimum profit for market makers could potentially shrink to a penny. Some nay-sayers also argue that getting quotes on a popular stock during times of volatile trade and heavy volume could be a hassle for computers handling penny increments. Although traders aren't likely to see any obvious benefits in the short term, markets are headed for more efficient pricing in the long term; and any way you slice it, this was a move who's time was long overdue.

Any questions or comments, love letters or hate mail? As always, feel free to forward them to kblack@internet.com.

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