Stock Market Decimalization
Complicated fractions abandoned in favor of pennies
by David Johnson
The New York Stock Exchange, NYSE, the world's largest, is converting to decimals. Price increases will be reported in dollars and cents, not in fractions. Those confusing announcements stating that a particular stock "is up 1 and 3/4ths" will soon be history. Announcements will say a particular stock is "up $1.75" above its previous value.
The change over began in August 2000, when the NYSE began trading seven stocks in decimals. The number was expanded to 57 companies in September. By February 2001, the stock in all the 3,025 companies listed on the NYSE - about 280.9 billion shares - will be traded in decimals, or pennies.Regulators Order Change
The U.S. Securities and Exchange Commission, the federal agency that oversees the nation's stock markets, ordered all U.S. stock markets (see below) to convert to decimals by April 9, 2001.
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The decimal system brings several benefits to the small investor, according to NYSE chairman and CEO Richard A. Grasso. In June 2000, he told a Congressional committee that decimals will generate stockholder savings. Studies have shown investors could save $1 billion or more a year.
Stockholders will save on commissions paid to stockbrokers. Commissions are often based on the price of a share. Previously, stock prices were measured in sixteenths of a dollar, or 6.25 cents. Now, price increases can be measured to the penny, making smaller fluctuations in price - and smaller commissions - possible.Compatible with World Markets
Since most other stock exchanges already use decimals, the U.S. will be more compatible with the rest of the world. "By bringing the U.S. into conformity with international practices, decimalization should improve the competitiveness of the U.S. markets," Grasso saidHuge Increase in Volume
Because decimals are easier to work with, a huge increase in the volume of shares traded is expected.
Grasso also told the committee that the NYSE has upgraded its technology to handle twice as many transactions. When decimalization is complete, the NYSE will be able to process 2,000 messages per second, or process transactions involving 10 billion shares per day. The previous limit was half that amount.
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The previous system using fractions dates from the 18th century when the NYSE was founded. It was based on the Spanish dollar which was divided into eighths. Price increments were measured by sixteenths of a dollar, or 6.25 cents. When a stock price rose "one and 5/8ths" it meant the price had risen $1 plus 5/8ths of a dollar, which is about 62 cents. The total increase was $1.62.
If the change does nothing else, it will make the stock market less mysterious and easier to understand.U.S. Stock Markets
There are two national stock exchanges in the United States, the New York Stock Exchange, and the American Stock Exchange. In addition, there are five regional exchanges, which are smaller and primarily handle regional stocks. These are the Boston, Chicago, Philadelphia, Cincinnati, and Pacific (in Los Angeles and San Francisco) exchanges.
In addition, there are several exchanges handling commodities, such as grain or pork belly futures, as opposed to stocks. These include the Chicago Board of Trade and the Chicago Mercantile Exchange. They all must operate in decimals by April 9, 2001.