Decimal Pricing Debut Points Way to the Future
In a debut that a New York Stock Exchange official called “historic yet routine,” the Big Board and the American Stock Exchange on Monday began trading a handful of stocks in dollars and cents instead of dollars and fractions.
Officials said trading went off with no glitches, marking the first time since the NYSE opened more than 200 years ago that prices were quoted in decimals.
The pilot program, the first step of a phase-in that will see all U.S. stocks and options traded in decimals by April, involved just 13 issues, seven on the NYSE and six on Amex. The Nasdaq Stock Market will not begin decimal trading until early next year; officials there said more time is needed to prepare their computer systems.
The main goals of decimalization, which has been pushed hard by the Securities and Exchange Commission, are to reduce investors’ hidden trading costs and make the markets more understandable for nonprofessionals. Experts have estimated that the savings to investors from decimalization could reach $3 million a day in U.S. markets.
Critics worry that trading in increments as small as a penny could make it harder for small investors to buy or sell in fast-moving markets. They also say it could allow professionals to profit at the expense of ordinary investors in certain situations.
With so few stocks involved in the pilot program, it was too early to tell Monday whether such problems would emerge.
Most investors already are used to seeing stocks priced in decimals, as The Times and many other newspapers publish price quotations in dollars and cents in their daily stock tables.
The cost-saving aspect concerns the “spread” between the “bid” price and the “asked” or “offered” price in typical trades in which a dealer acts as a middleman.
Under the fractional system, the minimum spread is generally 1/16 of a dollar, or 6.25 cents. Thus, a dealer might buy your stock at a $20-a-share bid price and instantly resell it to another customer at a $20.0625-a-share offer price.
For stocks traded decimally, however, the spread can drop as low as a penny.
That potential became reality Monday, as spreads in two of the most widely traded stocks involved in the pilot program, FedEx and Gateway, got as narrow as a penny at some points during the day, according to NYSE Group Vice President Robert Britz.
Spreads generally seemed a bit narrower among the decimal stocks but, on the other hand, “depth,” or the number of shares available at a particular price, was a little worse, said Andrew Cader, co-chief executive at Spear, Leeds & Kellogg, the NYSE specialist firm handling trading in the stocks involved in the introduction.
Other NYSE stocks trading in decimals Monday were Anadarko Petroleum, Forest City Enterprises (“A” and “B” shares), Hughes Supply and MSC Software.
Big Board officials say they chose the issues to get a diversity of trading-volume characteristics and to include at least a few stocks for which options are available. They also wanted all the stocks in the first batch to trade at a single specialist’s post on the floor of the exchange.
On the Amex, these stocks participated: EMagin, Global Light Telecommunications, Media General, ON2.com, Psychemedics and Regal Beloit. As at the NYSE, Spear, Leeds is the specialist handling all six issues.
The second phase of the program begins Sept. 25, when 57 more issues will be priced in decimals on the NYSE and 40 more on the Amex.
