Decimalization

What Is Decimalization?

Decimalization is a system where security prices are quoted utilizing a decimal organization instead of divisions. For instance, this is a decimal trading quote: $34.25. Utilizing parts, a similar quote would show up as $34 1/4. The U.S. Securities and Exchange Commission (SEC) requested all stock markets inside the U.S. to switch over completely to decimalization by April 9, 2001.

From that point forward, all price quotes have appeared in the decimal trading design. Before 2001, markets in the United States used parts in price quotes. The switch was made to decimalization to adjust to standard international practices and to make it more straightforward for investors to decipher and respond to changing price quotes.

Grasping Decimalization

Decimalization has prompted more tight spreads due to the relating more modest price augmentations and movements. For instance, prior to decimalization, one-sixteenth (1/16) of one dollar was the littlest price movement that could be addressed in a price quote (this is roughly six pennies or $0.0625). With decimalization, the base price movement is currently one penny, or $0.01, giving a greater number of price levels and taking into consideration more tight spreads between the bid and the ask levels for trading instruments.

Prior to executing decimalization in 2001, the littlest amount by which a security could be priced was called a teenie, which under the fractional system was a sixteenth. A few traders presently utilize "teenie" when they mean one penny.

The roots for the stock market's fractional least pricing system can be followed back to the Spanish domain's utilization of silver piece-of-eight coins, which American pilgrims would cut up into eight pieces to make change.

History of Decimalization for U.S.- Based Securities

On January 28, 2000, the Securities and Exchange Commission ("Commission") requested the accompanying exchanges to examine, create, and submit to the SEC a plan to carry out decimal pricing in the equities and options markets beginning no later than July 3, 2000:

American Stock Exchange LLC ("AMEX")
Boston Stock Exchange, Inc. ("BSE")
Chicago Board Options Exchange, Inc. ("CBOE")
Chicago Stock Exchange, Inc. ("CHX")
Cincinnati Stock Exchange, Inc. ("CSE")
National Association of Securities Dealers, Inc. ("NASD")
New York Stock Exchange ("NYSE")
Pacific Exchange, Inc. ("PCX")
Philadelphia Stock Exchange, Inc. ("PHLX")

The change began in mid-1997 when the SEC encouraged the exchanges to start pricing in decimals. The Securities Industry Association and the equities and options markets framed a Decimalization Steering Committee in July 1998 to foster a decimalization implementation plan and direction a smooth change.

Decimalization Phase-In

The exchanges suggested a worked in implementation, comprising of four phases, for the conversion to decimal pricing to reduce the risk to the investing public, issuers, exchanges, clearing and depository organizations, and member firms. The deliberately eased in implementation was believed to be the best method for guaranteeing that markets would keep on working in an efficient, orderly, and fair way during the conversion cycle.

This implementation period (the "Stage In Period") started on August 28, 2000, and finished with full implementation of decimal pricing for all equities and options by April 9, 2001. The New York Stock Exchange and the American Stock Exchange switched to decimalization on Jan. 29, 2001.

Features

The justification for the change was to adjust to international trading standards and to make it more straightforward at traders to decipher costs and place trades.
The U.S. Securities and Exchange Commission (SEC) ordered all exchanges convert to a decimalization system no later than April 9, 2001.
Decimalization is a price providing system where security cost estimates are addressed utilizing decimals rather than parts.
This is an illustration of a decimal trading quote: $25.75; this equivalent quote under a fractional quote system would be $25 3/4.