Spreads Narrowing on Decimalized Blue Chips

Early results suggest that pricing blue-chip stocks in decimals is providing a better deal for investors--exactly what regulators had hoped for.

Spreads--the difference between what a buyer and seller are asking for a stock--dropped an average of 46.4% for the 28 stocks of the Dow Jones industrial average that traded in decimals Monday, according to research firm Instinet Research.

Government regulators pushed for the shift to 1-cent increments--ending the centuries-old practice of listing stocks in fractions--partly in the hope of reducing the spread between “bid” and “asked” prices for stocks. Both the New York Stock Exchange and the American Stock Exchange completed the conversion Monday, which brings them in line with markets around the globe.

Under fractional pricing, there was a minimum spread of 1/16th, or 6.25 cents, between bid and asked prices for most stocks. Now, the spread could conceivably be a mere penny on any stock.

The spread for SBC Communications (ticker symbol: SBC) dropped the most Monday, falling nearly 72% to 4 cents a share from an average of 14 cents in the week leading up to decimalization. The spread for AT&T; (T) narrowed the least but still fell about 28% to 6 cents from 8 cents, Instinet Research said.

Despite the narrowing spreads, traders have warned that investors’ costs could rise because of the increased staffing it takes to complete trades in a decimal environment, where prices jump around more frequently. The expected higher volatility comes from the number of pricing points available between dollars, which jumped to 100 from 16 when the switch was made from fractions.

What’s more, while spreads may narrow, the number of shares available at individual penny price points may drop, making it tougher to complete trades. “Just because the spreads are tighter does not mean that there’s more liquidity,” said Robert Basel, managing director of trading at Salomon Smith Barney.

Dow components Microsoft (MFST) and Intel (INTC), which are listed on Nasdaq, are the only two of the Dow 30 still traded in fractions. Nasdaq has said it will be decimal-ready by the Securities and Exchange Commission’s April 9 deadline.