Those hidebound ways are about to change. The Nasdaq Stock Market last week began pricing securities in increments of one sixteenth; so did the venerable New York Stock Exchange. The American Stock Exchange made the switch earlier this year. And under pressure from Congress and regulators, all three plan eventually to abandon awkward fractions altogether. Stocks would instead be priced the way everything else is, in straight dollars and cents. That is, in decimals.
Whoop-de-do, you might say. What difference will that make for small investors? Potentially a lot, actually. Not just because of the money it might save today, but because of broader changes it portends for the way Wall Street does business.
Let’s start with the here and now: how the changes could save you money. Assume you want to buy 100 shares of a hot high-tech company named Internet Inc. at the market price. You call your broker. He executes your order at 40 1/4 and debits your account for $4,025, not counting any fees or commission. But your broker hasn’t bought the stock at that “ask” price; more likely he’s paid a “bid” price of 40 1/8, and he’s pocketed the difference, or “spread,” of 12.5 cents a share. But when stocks are priced in sixteenths, the minimum spread shrinks by half. That means it’s at least possible that you could pay 40 3/16,or $4018.75, for your shares.
Do six bucks and two bits amount to a hill of beans? That depends on you: how often you buy or sell stocks, how much money you have to invest to begin with, whether you’re a penny pincher or a spendthrift. But clearly, over years of investing, such savings could add up. As for Wall Street, our gain is its loss: brokers profit heavily from playing the spread, and a few forsaken pennies really pile up over millions of shares.
Decimalization, as financial wonks call it, is the next logical step. For starters, it would be a big victory for financial simplicity. “It will just be a lot easier to do the math,” says Steven Wallman, an SEC commissioner who’s been pushing the change. And because spreads would potentially narrow to as little as a penny, decimalization would place even more of a squeeze on the Street. No wonder that brokers have reesisted change for so long-and why they’re worried about the future. “Firms in the business of buying and selling stocks will have to find more efficient ways to run their business, if they’re to stay profitable,” says Junius Peake, a retired vice chairman of the National Association of Securities Dealers and now a professor of finance at the University of Northern Colorado. That upheaval, he predicts, will produce an explosion of competition in securities trading, including the creation of new “virtual” exchanges where investors buy and sell directly over the Internet, bypassing fee-grubbing middlemen altogether. In other words, pirates beware: your cherished pieces of eight are up for grabs.
