What Is Decimalization?
Decimalization is a gadget where protection prices are quoted the usage of a decimal structure somewhat than fractions. For instance, this can be a decimal purchasing and promoting quote: $34.25. Using fractions, the identical quote would appear as $34 1/4. The U.S. Securities and Industry Charge (SEC) ordered all stock markets all over the U.S. to change into to decimalization by way of April 9, 2001.
Since then, all price quotes have appeared inside the decimal purchasing and promoting structure. Previous to 2001, markets in america implemented fractions in price quotes. The switch was made to decimalization to conform to standard international practices and to make it more uncomplicated for investors to interpret and react to changing price quotes.
Key Takeaways
- Decimalization is a price quoting gadget where protection prices are represented the usage of decimals instead of fractions.
- This is an example of a decimal purchasing and promoting quote: $25.75; this identical quote underneath a fractional quote gadget will also be $25 3/4.
- The U.S. Securities and Industry Charge (SEC) mandated all exchanges convert to a decimalization gadget no later than April 9, 2001.
- The reason for the change was to conform to international purchasing and promoting necessities and to make it more uncomplicated for traders to interpret prices and place trades.
Understanding Decimalization
Decimalization has resulted in tighter spreads because of the corresponding smaller price increments and movements. For instance, prior to decimalization, one-sixteenth (1/16) of one greenback was the smallest price movement that may be represented in a price quote (this is kind of six cents or $0.0625). With decimalization, the minimum price movement is now one cent, or $0.01, providing a greater choice of price levels and taking into account tighter spreads between the bid and the ask levels for getting and promoting gear.
Prior to imposing decimalization in 2001, the smallest amount during which a security could be priced was referred to as a teenie, which underneath the fractional gadget was a sixteenth. Some traders now use the word “teenie” when they suggest one cent.
The roots for the stock market’s fractional minimum pricing gadget can also be traced once more to the Spanish empire’s use of silver piece-of-eight money, which American colonists would cut up into 8 bits to make change.
History of Decimalization for U.S.-Based Securities
On January 28, 2000, the Securities and Industry Charge (“Charge”) ordered the following exchanges to discuss, expand, and put up to the SEC a plan to put in force decimal pricing inside the equities and possible choices markets beginning no later than July 3, 2000:
- American Stock Industry LLC (“AMEX”)
- Boston Stock Industry, Inc. (“BSE”)
- Chicago Board Possible choices Industry, Inc. (“CBOE”)
- Chicago Stock Industry, Inc. (“CHX”)
- Cincinnati Stock Industry, Inc. (“CSE”)
- National Association of Securities Dealers, Inc. (“NASD”)
- New York Stock Industry (“NYSE”)
- Pacific Industry, Inc. (“PCX”)
- Philadelphia Stock Industry, Inc. (“PHLX”)
The change started in mid-1997 when the SEC prompt the exchanges to begin pricing in decimals. The Securities Trade Association and the equities and possible choices markets formed a Decimalization Steering Committee in July 1998 to expand a decimalization implementation plan and coordinate a blank transition.
Decimalization Segment-In
The exchanges advisable a phased-in implementation, consisting of four phases, for the conversion to decimal pricing to reduce the danger to the investing public, issuers, exchanges, clearing and depository organizations, and member firms. The phased-in implementation was thought to be among the best solution to make sure that markets would continue to accomplish in an efficient, orderly, and fair method everywhere the conversion process.
This implementation period (the “Segment-In Period”) began on August 28, 2000, and ended with entire implementation of decimal pricing for all equities and possible choices by way of April 9, 2001. The New York Stock Industry and the American Stock Industry switched to decimalization on Jan. 29, 2001.
