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. All price quotes since 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.
BREAKING DOWN 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.
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.
The exchanges recommended a phased-in implementation, consisting of four phases, for the conversion to decimal pricing that reduces 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.