What a Difference a Dot Makes
After two centuries of pricing stocks in dollars and fractions, the nation’s stock exchanges Monday began the switch to dollars and cents, not a revolutionary change and one that will take until next April to fully implement. But, when in place, the cents will add up to millions of dollars in savings for investors.
The current system is an expensive 18th century anachronism paid for by stock purchasers. It allows a wider spread between the bid and ask prices of stocks--the difference between the best price offered to buy a stock and the best price offered to sell--and imposes arbitrary limits on price competition. The smallest change in prices on the New York Stock Exchange today is 1/16 of a dollar, or 6.25 cents. It’s the trader who pockets the difference.
Under the decimal system, the spread may well drop to a penny. For example, if an investor places an order to buy 100 shares of a given company trading at around $10, the lowest incremental price today would be 10 1/16th of a share, or $10.0625.
With the decimal system in place, the same investor might be able to buy the shares at $10.01 a share. On a 100-share trade, the investor would save $5.25. Small change, perhaps, but at a billion shares trading on the Big Board daily, it adds up.
The stock exchanges have been fighting the decimal conversion tooth and nail, and for a good reason. With the advent of electronic trading, competition among Wall Street brokerages is heating up, depressing spreads. The switch to decimals will put an even greater downward pressure on spreads.
It’s not certain yet whether the markets will slice the spreads down to a penny or will limit price changes to a nickel or a dime. The Securities and Exchange Commission, which forced the stock exchanges to go decimal, has left that decision up to the markets. Clearly, in shares that are always in demand, such as Microsoft, the competition will be tougher and the spreads will be narrower. In less-traded shares, that may not be so. The SEC must remain vigilant to make sure the markets don’t impose new limits on price changes.
The switch will bring the U.S. markets in line with the rest of the world, make stock pricing easier to understand and save investors money. Not .50 (half) bad.
