Stocks priced down to the decimal

Wall Street begins trading a handful of equities in dollars and cents rather than fractions

Those who followed the value of their stocks this past week may be wondering: "Where have all the fractions gone?"

Answer: They're slowly passing away. (Apologies to folk singer Pete Seeger.)

Last week, the New York Stock Exchange officially shifted from trading stocks in fractions to decimals. The Big Board is starting out modestly, listing seven stocks in decimals: Anadarko Petroleum, FedEx, Forest City Enterprises (shares A and B), Gateway, Hughes Supply, and MSC.Software Corp.

The American stock exchange is also starting out slowly, with six companies.

Options to these stocks are also being traded in decimals.

Nasdaq, the nation's largest electronic stock trading system, will begin its decimal program in the spring of 2001.

Meantime, the nation's leading newspapers, including The Wall Street Journal and The New York Times, have already converted their stock figures to decimals.

The shift provides two main advantages for investors:

Clarity. It's going "to be easier" to determine the value of share prices, says Arnold Kaufman, editor of "The Outlook," a market review published by Standard & Poor's Corporation.

For example, under the new system, FedEx closed last Monday at $40.71, a drop of 54 cents from its previous close.

Compare that with the FedEx listing in The Wall Street Journal a few weeks earlier. On Aug. 7, the stock closed at 39 3/8, up 1/16. Do the math, and you know that means the stock closed at $39.38 (rounding up a half-cent), up 6.25 cents.

By listing in decimals, investors won't have to convert such fractions into dollars.

Lower trading costs. Federal regulators hope the change will save investors money as the gap or "spread" between a stock's buy and sell price shrinks.

In a fraction system, the smallest spread amount is 1/16 or 6.25 cents per share. So a trade of 500 shares involving this "teeny" spread would cost the investor who buys the stock $31.25. That money goes to "market makers" - middlemen who bring buyers and sellers of stocks together. (The amount doesn't include any additional brokerage fees paid by the buyer and seller.)

Under the new system, if the same order changed hands at the lowest decimal - one cent - market makers would only make $5, a savings of $26.25 for investors. "It's always good when the little guy gets a fairer shake on costs," says Mr. Kaufman.

The US government accounting office estimates that the shrinkage in the spread could save investors up to $2 billion annually. But rather than losing money, the market makers are expected to make greater profits as investors trade more to take advantage of the narrowing spread - in effect, boosting total volume.

One of the few companies trading in decimals saw a bump in volume in the first day: About 47,000 shares of MCS.Software Corp. were traded last Monday, compared with an average daily volume of about 29,400.

Federal regulators and consumer advocates have expressed concern that the higher volume will boost volatility in the stock market. They also point out that some market professionals (often speculators and day traders) may be able to manipulate the narrower differences in the spread for greater profits.

But Hamid Biglari, a partner with McKinsey & Co. in New York, argues that decimalization will increase market risks for frequent traders bent on capturing small gains. Long-term buy-and-hold investors should be little affected by the change, he adds.

The biggest concern now is the impact the decimal system will have on the financial industry's electronic systems, says John Murabito, chief operating officer of financial-services firm Investec Ernst & Co., in New York.

Assuming that trading volume rises, US financial firms need to make certain that their computer systems "have the capacity" to handle the stepped up trading activity, says Mr. Murabito.

Ironically, the US stock exchange - which prides itself on its up-to-date electronics and high-tech wizardry - is the last user of a fraction-based system among industrialized nations. Most major foreign stock exchanges, such as the London Stock Exchange and the Tokyo Stock Exchange have already converted to decimals.

Part of the reason for America's tardiness is historical. The US trading system dates back to the late 1700s when stocks were tied to Spanish currency, which used increments of one-eighth. As a result, brokerage houses and exchanges became locked into the fractional system.

Now, computers must be upgraded to handle decimals - somewhat similar to the way computers had to be upgraded for the Y2K changeover at the end of last year to accommodate a change in the calendar.

Hopefully, any technical glitches will be quickly resolved, Murabito says.

Phase two of the Big Board changeover occurs Sept. 25, when 52 more companies will be traded in decimals. The American Stock Exchange will also add another 40 to 50 companies later this fall.

(c) Copyright 2000. The Christian Science Publishing Society

You've read  of  free articles. Subscribe to continue.
QR Code to Stocks priced down to the decimal
Read this article in
QR Code to Subscription page
Start your subscription today