The New York Stock Exchange, ending a centuries-old tradition, will have its stock trading in decimals. The move, endorsed by the Big Board, will make it the first U.S. exchange to go to decimals. The new system could narrow the minimum spread between the prices at which most stocks are bought and sold from the current one-eighth of a dollar, or 12.5 cents. Moving to decimal pricing would, at least in theory, allow the minimum trading increment to shrink to a penny, but it is more likely that the Big Board will follow the example of the Toronto Stock exchange, where the minimum increment for most stocks is a nickel.

The U.S. is the only major market in the world that doesn't use decimals to quote securities prices. U.S. stocks have traded in eighths since colonial days when Spanish coins were sliced into eight pieces for use as currency and called "bits." As an interim step, the exchange will begin quoting in 1/16 increments, half the 1/8 increments in which it has traded stocks since the exchange was established in 1792. The interim step of 1/16ths would help brokers prepare themselves for decimal-based trading.

The Big Board told securities firms yesterday to be ready to convert to decimals by the year 2000. The exchange itself would likely be ready as early as May 1998. The move to begin quoting in 1/16 increments is projected for June 23, when necessary upgrades are made to the Intermarket Trading System which links the nation's exchanges.

Decimal pricing has been a long time issue of consumer advocates, who say investors would benefit from more efficient pricing. Using Canada's Toronto exchange as an example, they note how it is the only major exchange that has ever made a clean switch in April '96 from fractions to decimals. Other insights on the Toronto conversion, however, say there were some unpleasant side effects. For example, trading in smaller minimum increments tends to boost the ability of professional traders to step ahead of public customer who place limit orders, or orders to buy or sell a security at a specific price or better. Using a strategy called "quote matching," these traders intentionally buy shares on which investors have placed limit orders. If the stocks go up, the traders will benefit from the higher share price. But if the stock price slides, they will unload the shares by selling them at the investor's specified price.


-- Posted the week of June 9, 1997

Source: The Wall Street Journal June 6, 1997 pg. C1