In this "new economy" era, exemplified by computers, globalization and precision, the cornerstone of the U. S. financial system -- the stock market -- still relies on an inexact measurement system dating to the Spanish conquistadors.
They used the system known as fractions.
Professional investors don't much mind having stock prices quoted in eighths and sixteenths of a dollar, viewing fractions as a kind of secret knowledge that separates the in-the-trenches traders from the investing masses.
Professionals know that "sixteen and three teenies" is trading-floor parlance for a stock selling for 16 and three-sixteenth dollars -- a sixteenth being the smallest increment of a dollar at which a stock is typically priced. For anyone else, the only apparent logic of quoting a stock price at sixteen and three teenies -- which works out to $16.1875 -- is to force the back-of-the-napkin arithmetic that calculators have otherwise abolished.
As of tomorrow, however, fractions give way to decimals: The venerable New York Stock Exchange -- the Big Board -- will begin the first phase of a program ordered by the Securities and Exchange Commission requiring stock prices to be quoted in dollars and cents instead of dollars and fractions. The stocks of six companies will be listed and traded in increments of a penny.
On Sept. 25, brokers will begin trading the shares of 52 more companies in decimal form. Some months later, the Big Board and the SEC will study the results and decide when all of the New York Stock Exchange's listed shares will trade this way. In any case, all U. S. stock and options markets will make the switch to decimals by April 9.
"We felt this move would make prices more easily understandable," says Raymond Pellechia, a spokesman for the NYSE. "It will also reduce spreads" -- the profit the middlemen traders pocket each time there's a transaction.
For two centuries, U.S. markets traded bonds and then stocks in increments of eighths of a dollar (12.5 cents). In June 1997, the Big Board voted to reduce that increment to a sixteenth (6.25 cents), which remains the standard today (though stocks can be priced in increments as small as two-hundred-fifty-sixths).
But even a sixteenth produces a wide "spread" -- the difference between what a buyer pays for a share of stock and what the seller will accept. With fractions, the typical spread is one-sixteenth of a dollar. With decimals, those spreads will drop to one cent. That should place billions of additional dollars a year in the pocketbooks of investors, rather than in the pockets of professionals on the trading floor.
The United States will be the last country to make the jump to decimals. During the 1990s, the U.S. economy became the fastest-growing in the industrial world, in part because of the country's technological prowess. But no less important was the country's well-developed and highly liquid financial system, fueled in part by rocketing stock prices that enriched investors and made it easy for young companies to raise the money they needed for growth.
But the devotion to fractions kept the U.S. stock markets from being as efficient as they otherwise might have been and in a sense left them mired in the 17th century.
The reliance on fractions can be traced to when English and Spanish colonies in the New World -- lacking currencies of their own -- depended on whatever coinage traders chose.
Many currencies were in circulation, and their values were subject to large and unpredictable swings. Merchants came to prefer the real, a silver Spanish coin that was of especially dependable purity and weight. That coin's place in the world economy dated to 1537, when Spain's Charles I set precise standards for the kingdom's coinage.
Embossed on the back of each of the milled silver coins was a large cross. With a hammer and chisel, or a pair of shears, people could divide the coin into halves, quarters or eighths -- hence the expression "pieces of eight." Beginning in the 1650s, the piece of eight became the standard currency in the New World, and it retained that status for the next century.
Merchants who dabbled in financial markets and conducted business overseas helped cement the reliance on the Spanish coin. And because that coin was based on eighths, merchants priced goods in eighths and traded stocks and bonds the same way. That resulted in the system of fractions for financial trades.
In addition to how those merchants traded, where they traded became important. In 1685, surveyors laid out Wall Street in lower Manhattan, following the line of a 12-foot-high stockade built in 1653 to protect Dutch settlers from attacks.
