Stock quotes in decimals start today in this section

Industry phasing out traditional fractions for simpler method

May 31, 2000|By William Patalon III | William Patalon III,SUN STAFF

In his 30 years in the investing game, professional money manager James Hardesty has developed an appreciation for the traditions that guide his industry.

Veteran investors such as Hardesty - the president of Baltimore-based Hardesty Capital Management, a downtown investment advisory firm - have mixed feelings about the industry plan to replace fractions with decimals when it comes to quoting and trading stocks.

On one hand, the conversion will end a centuries-old practice with which long-term players have grown quite comfortable. On the other hand, the changeover will end the need for the numbing mental arithmetic that new investors have to go through to really understand what they are paying for a stock, or the precise price at which their shares are trading.

And that could be good, even veterans such as Hardesty believe.

"This has never been a problem for me," Hardesty said. "But change is change, and people will adapt."

As part of this shift, The Sun today begins listing share prices in decimals, instead of in fractions. Sometime in 2001, all the U.S. stock exchanges will fully shift to "dollars-and-cents" pricing.

The U.S. stock market is the only one in the world that quotes stocks in fractions, and the changeover has been slow. The practice dates to Colonial America, when the currencies colonists used included Spanish coins that could be cut into halves, quarters and eighths. Technology has also been an impediment, since the computer systems that govern everything from stock quotes to the actual trades had to be modified, too.

In late January, the Securities and Exchange Commission ordered U.S. stock exchanges to begin a phase-in of a decimal-based, stock-pricing system by July 3. Options markets would have to comply by the end of the year. At the time the SEC order was issued, the exchanges said they would be able to comply without major hitches. But in March, the Nasdaq stock market told the SEC that it would not be able to meet the deadline, an admission that had been an open secret for months.

In April, the SEC opted to delay the conversion, expressing concern that a changeover now could have a "negative impact" on the order routing, trading and settlement systems of the securities industry - and perhaps lead to some investor confusion.

Instead, the agency is requesting comments from consumers and the industry on two new plans for the conversion to decimals, said John Heine, spokesman for the SEC in Washington.

Proponents of decimal trading say it will benefit investors by allowing greater competition and making it easier to compare prices. They also point out that it will narrow the difference between a stock's best bid and asking prices, known as the spread. Spreads typically vary from 12.5 cents to 50 cents, an amount that adds up to a sizable profit for brokers, who take in a percentage based on the size of the spread.

Critics say those narrower spreads would erode profits, something that could reduce the number of market makers, the firms that form a market's backbone by facilitating trading.

One question is whether stock quotes will change in increments of a nickel or a penny.

Currently, on the New York Stock Exchange, stocks trade in increments of a sixteenth of a dollar. That means that, for each dollar, there are 16 different "price points" at which a stock can trade. That number of price points will grow to 20 if stocks are traded in increments of a nickel, and to 100 if share prices are quoted in increments of a penny.

Some in the industry fear that a plan organized around the penny could cause an explosion in the volume of quotes and trades so severe that it could swamp the current trading systems.

One of the plans on which the SEC is seeking comments calls for a pilot program to list certain securities in decimals by Sept. 4. Then, on March 31, that pilot program would expand to include all exchange-listed securities - as well as options on those securities - listing them in penny increments.

The March 31 deadline would include the Nasdaq stock market, under the SEC proposal.

Whenever it comes, the changeover may leave longtime investors a bit wistful.

"Is there any real difference between fractions and decimals? You tell me," says Hardesty.

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