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Decimalization Definition

May 11, 2022
Decimalization Definition

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What Is Decimalization?

Decimalization is a system the place safety costs are quoted utilizing a decimal format reasonably than fractions. For instance, it is a decimal buying and selling quote: $34.25. Utilizing fractions, the identical quote would seem as $34 1/4. The U.S. Securities and Alternate Fee (SEC) ordered all inventory markets throughout the U.S. to transform to decimalization by April 9, 2001.

Since then, all value quotes have appeared within the decimal buying and selling format. Earlier than 2001, markets in the US utilized fractions in value quotes. The change was made to decimalization to adapt to straightforward worldwide practices and to make it simpler for buyers to interpret and react to altering value quotes.

Key Takeaways

  • Decimalization is a value quoting system the place safety costs are represented utilizing decimals as an alternative of fractions.
  • That is an instance of a decimal buying and selling quote: $25.75; this similar quote beneath a fractional quote system can be $25 3/4.
  • The U.S. Securities and Alternate Fee (SEC) mandated all exchanges convert to a decimalization system no later than April 9, 2001.
  • The rationale for the change was to adapt to worldwide buying and selling requirements and to make it simpler for merchants to interpret costs and place trades.

Understanding Decimalization

Decimalization has led to tighter spreads due to the corresponding smaller value increments and actions. For instance, previous to decimalization, one-sixteenth (1/16) of 1 greenback was the smallest value motion that may very well be represented in a value quote (that is roughly six cents or $0.0625). With decimalization, the minimal value motion is now one cent, or $0.01, offering a better variety of value ranges and permitting for tighter spreads between the bid and the ask ranges for buying and selling devices.

Previous to implementing decimalization in 2001, the smallest quantity by which a safety may very well be priced was referred to as a teenie, which beneath the fractional system was a sixteenth. Some merchants now use the phrase “teenie” after they imply one cent.

The roots for the inventory market’s fractional minimal pricing system might be traced again to the Spanish empire’s use of silver piece-of-eight cash, which American colonists would minimize up into eight bits to make change.

Historical past of Decimalization for U.S.-Based mostly Securities

On January 28, 2000, the Securities and Alternate Fee (“Fee”) ordered the next exchanges to talk about, develop, and submit to the SEC a plan to implement decimal pricing within the equities and choices markets starting no later than July 3, 2000:

  • American Inventory Alternate LLC (“AMEX”)
  • Boston Inventory Alternate, Inc. (“BSE”)
  • Chicago Board Choices Alternate, Inc. (“CBOE”)
  • Chicago Inventory Alternate, Inc. (“CHX”)
  • Cincinnati Inventory Alternate, Inc. (“CSE”)
  • Nationwide Affiliation of Securities Sellers, Inc. (“NASD”)
  • New York Inventory Alternate (“NYSE”)
  • Pacific Alternate, Inc. (“PCX”)
  • Philadelphia Inventory Alternate, Inc. (“PHLX”)

The change began in mid-1997 when the SEC urged the exchanges to start pricing in decimals. The Securities Trade Affiliation and the equities and choices markets fashioned a Decimalization Steering Committee in July 1998 to develop a decimalization implementation plan and coordinate a easy transition.

Decimalization Section-In

The exchanges beneficial a phased-in implementation, consisting of 4 phases, for the conversion to decimal pricing to cut back the chance to the investing public, issuers, exchanges, clearing and depository organizations, and member companies. The phased-in implementation was regarded as the best means to make sure that markets would proceed to function in an environment friendly, orderly, and honest method throughout the conversion course of.

This implementation interval (the “Section-In Interval”) started on August 28, 2000, and ended with full implementation of decimal pricing for all equities and choices by April 9, 2001. The New York Inventory Alternate and the American Inventory Alternate switched to decimalization on Jan. 29, 2001.