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 [email protected].


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