A fraction at a time

Stocks gradually moving to decimals

Like the horse and buggy before it, the era when investors have to break out their calculators to convert stock prices from fractions to decimals will soon be over, but not as quickly as some market observers thought.

In January 2000, the Securities and Exchange Commission mandated that U.S. stock prices be quoted in decimals by July 3, a process called decimalization. It would end the two-centuries-old practice of quoting stocks in fractions, abandoned by every other major equities market in the world except the U.S. But the securities industry has said the move, considered one of the broadest overhauls of the stock market in recent years, most likely won’t happen by the SEC deadline, and could be delayed till next year.

The plan calls for all the exchanges, among them the New York Stock Exchange and the Nasdaq, to begin quoting stocks in 5-cent increments by the summer. Eventually, stocks will be quoted in 1-cent increments.

But the National Association of Securities Dealers, the parent of the Nasdaq, formally asked SEC Chairman Arthur Levitt to delay the implementation of decimal pricing till 2001. And while the NYSE has said it’s ready for decimalization, industry observers think it’s highly unlikely the Big Board will make the change on its own.

The SEC has concluded that the change won’t happen on schedule. “My guess would be the July 3 date would be pushed back,” said Robert Colby, deputy director of market regulation at the SEC, at a conference March 22 hosted by the Securities Industry Association, the trade group for the brokerage industry.

Changing to the decimal system would narrow the difference between the price offered by buyers, known as the bid, and the price requested by sellers, called the ask. In Wall Street jargon, the gap between the bid and ask prices is called the spread. Currently, spreads vary from 12 cents to 50 cents. That adds up to a nice profit for brokers, since they get a percentage based on the spread.

Opponents say narrower spreads will erode profits and possibly reduce the number of market makers, firms that form the backbone of the U.S. equities market. But supporters say narrower spreads will increase market efficiency, boost trading volume and improve liquidity.

A couple of obstacles, past and present, have blocked implementation of the change. For example, brokerage firms put decimalization on the back burner because of preparations for Y2K. It took three years and about $5 billion for the securities industry to fully inoculate its systems against the so-called millennium bug, a glitch that caused some computers to read the year 2000 as 1900.

Then there’s the cost. Securities firms alone will invest nearly $1 billion to successfully convert their systems to decimal pricing, according to a study by the Tower Group, an information-technology consulting firm in Needham, Massachusetts.

So, till decimalization becomes a reality, keep dividing the numerator by the denominator to determine that, say, 11/32 in a stock’s price equals 0.34375 cents.

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