What Is Decimalization?

Decimalization is a system where security prices are quoted using a decimal format rather than fractions. For example, this is a decimal trading quote: $34.25. Using fractions, the same quote would appear as $34 1/4. The U.S. Securities and Exchange Commission (SEC) ordered all stock markets within the U.S. to convert to decimalization by April 9, 2001.

Since then, all price quotes have appeared in the decimal trading format. Before 2001, markets in the United States utilized fractions in price quotes. The switch was made to decimalization to conform to standard international practices and to make it easier for investors to interpret and react to changing price quotes.

Key Takeaways

  • Decimalization is a price quoting system where security prices are represented using decimals instead of fractions.
  • This is an example of a decimal trading quote: $25.75; this same quote under a fractional quote system would be $25 3/4.
  • The U.S. Securities and Exchange Commission (SEC) mandated all exchanges convert to a decimalization system no later than April 9, 2001.
  • The reason for the change was to conform to international trading standards and to make it easier for traders to interpret prices and place trades.

Understanding Decimalization

Decimalization has led to tighter spreads because of the corresponding smaller price increments and movements. For example, prior to decimalization, one-sixteenth (1/16) of one dollar was the smallest price movement that could be represented in a price quote (this is approximately six cents or $0.0625). With decimalization, the minimum price movement is now one cent, or $0.01, providing a greater number of price levels and allowing for tighter spreads between the bid and the ask levels for trading instruments.

Prior to implementing decimalization in 2001, the smallest amount by which a security could be priced was called a teenie, which under the fractional system was a sixteenth. Some traders now use the word "teenie" when they mean one cent.

The roots for the stock market's fractional minimum pricing system can be traced back to the Spanish empire's use of silver piece-of-eight coins, which American colonists would cut up into eight bits to make change.

History of Decimalization for U.S.-Based Securities

On January 28, 2000, the Securities and Exchange Commission ("Commission") ordered the American Stock Exchange LLC ("AMEX"), the Boston Stock Exchange, Inc. ("BSE"), the Chicago Board Options Exchange, Inc. ("CBOE"), the Chicago Stock Exchange, Inc. ("CHX"), the Cincinnati Stock Exchange, Inc. ("CSE"), the National Association of Securities Dealers, Inc. ("NASD"), the New York Stock Exchange ("NYSE"), the Pacific Exchange, Inc. ("PCX"), and the Philadelphia Stock Exchange, Inc. ("PHLX") to discuss, develop, and submit to the SEC a plan to implement decimal pricing in the equities and options markets beginning no later than July 3, 2000.

The change started in mid-1997 when the SEC urged the exchanges to begin pricing in decimals. The Securities Industry Association and the equities and options markets formed a Decimalization Steering Committee in July 1998 to develop a decimalization implementation plan and coordinate a smooth transition. 

Decimalization Phase-In

The exchanges recommended a phased-in implementation, consisting 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 phased-in implementation was thought to be the most effective way to ensure that markets would continue to operate in an efficient, orderly, and fair manner during the conversion process. 

This implementation period (the "Phase-In Period") began on August 28, 2000, and ended 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.