| Fractious Fractions |
19 May 2003
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Wall Street Reconsiders Dollars and Cents Trading
Back in the year 2000, Wall Street got something right. Trading in American stocks went from quarters, eighths and sixteenths of a dollar to a decimal system. However, progress is not always noticed, and it was in such a vein that the SEC has announced a review of the situation. It seems that trading in pennies is too hard.
The old system, which goes back to Spanish "pieces of eight," allowed trading increments of about 6 cents (a sixteenth, although there weer a few thirty-secondths trades as well). The new system allows for one cent trades. The difficulty arises with computerization. An offer at $1.03 won't get taken by a $1.02 bid, while under the old system there was a better chance of the bid and ask coming to market at $1 even. Traders complain that the new system denies them some trades that would get filled were the increment different.
The solution, of course, is far easier than reverting to the other system -- namely trade in nickles and/or dimes. Require prices to end in a 0 or 5, which approximates the old 6 cent trading-increments. At the same time, the sensible decimal system is retained.
Rather than this simple reform, one can expect Wall Street to spend a lot of time and effort deciding which wheel to re-invent. In the end, it won't matter very much. Until earnings reports start sounding better to investors, trades could be denoted in wampum and salt for all the good it would do.