Penny Pricing May Simplify Math but Multiply Volatility

Starting Monday, investors buying or selling any New York Stock Exchange or American Stock Exchange stock will no longer face the confusing math of fractional prices.

When talking to your broker or entering a price online, you’ll find NYSE and Amex stocks quoted in simple decimal increments--and you’ll be able to enter buy or sell prices in any penny increment.

Investors who have traded in stocks such as Gateway Inc., Kimberly-Clark Corp. and Lockheed Martin Corp. lately already have experienced decimal pricing. Those are among the NYSE shares that have been traded in decimals under a pilot program. (The Times’ stock listings, meanwhile, have been translated to decimals for the last year.)

The great allure of decimal pricing, of course, is its simplicity. But experts say investors also are likely to find that stocks are more volatile with penny pricing.

Also, because decimal pricing probably will mean that fewer shares are available in the market at a specific price, even small trades may get executed at several different prices, a penny or two apart, experts warn. Besides causing accounting headaches at tax time, that may lead to more disputes between brokers and their customers.

Experts such as USC finance professor Lawrence Harris advise investors to consider using “marketable” limit orders, especially when dealing in hot stocks. A limit buy order is an order to buy at a specific price or better. A marketable limit buy order is placed at the current market price or a few cents higher. It may cost you some money, but if you’re anxious to get in, such orders may improve your odds of getting the trade done while still protecting against buying at a sharply higher price if the stock surges.