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The Decimals Are Coming!

Thirteen companies began trading in decimals today. More are on the way. The move should help investors by trimming away at spreads, though market makers might feel the pinch in trading profits. If nothing else, the very nature of stock quotes as we know it is about to go in for a makeover. Ladies and gentlemen, the fractions have left the building.

By Rick Aristotle Munarriz (TMF Edible)
August 28, 2000

FedEx (NYSE: FDX) still delivers -- only it no longer does so fractionally. Investors of the overnight parcel specialist woke up this morning to company stock quotes served up the same way its shipping charges are served up -- in dollars, decimals, and cents.

FedEx joins a dozen other companies today in the first wave of the Securities and Exchange Commission's mandated move to dismantle the archaic fraction-based system.

"Decimal trading will benefit investors by allowing greater competition and making it easier to compare prices," SEC Chairman Arthur Levitt said when the measure was first announced back in January.

Partial rollout of the Decimalization Implementation Plan was supposed to have started last month, but when the National Association of Securities Dealers (NASD) proposed that its system would not be ready to handle the volume of quote traffic, the deadline was bumped. Either way, by April 9, 2001, all stocks will be trading in decimals.

A 1/100th for your thoughts
The move away from fractions puts the stateside market in line with the rest of the digital decimal world. That might serve as reason alone to applaud the change, but keep in mind -- as the Olympics gear up in Sydney next month -- that we are a strongheaded lot that never quite took to the metric system of standardization either.

Among the stocks joining FedEx in today's decimalization will be Boring Portfolio holding Gateway (NYSE: GTW). The cow-patched packaged computer maker's stock closed at $66 3/16 on Friday but greeted the new trading day off a base of $66.19. It might take some getting used to, but the rewards should be well worth it for investors.

The nickel defense
The initial plans call for minimum price increments as low as a penny but no greater than a nickel. That is still a smaller step than the $0.0625 coinage represented by a 1/16th move in a stock's price.

Granted, supply is still critical. Thinly traded securities are bound to continue to display wide ranges between the bid and ask prices. The market makers will still reap juicy spreads there. Pardon the wordplay, but those illiquid stocks will continue to nickel and dime traders to death -- only now they will do so literally.

But for popular issues with sustainable trading volume, the cost savings to buy in and cash out will be substantial. Over the course of a year Levitt expects investors to save a billion dollars in trading costs. And, yes, a lot of that will come at the dealer's expense.

"Communism sounded good too, until it became real," E.E. Geduld, president of giant market maker Herzog Heine Geduld, told The Wall Street Journal back in 1996 when the first rumblings of decimalization came about.

Biased? Naturally. But it's not as if the brokerage community will take the fractional losses lightly. Will market makers force higher transaction costs to offset the lost profits? That remains to be seen. Some observers, such as the Fool's Zeke Ashton (TMF Centaur), believe that market makers like Knight Trading (Nasdaq: NITE) might still be able to make it up -- at least partly -- in volume. A kinder pricing strategy might serve as a clear incentive for more market transactions.

Down for the count
Along with Gateway and FedEx, the other companies going decimal today are Anadarko Petroleum (NYSE: APC), Hughes Supply (NYSE: HUG), MSC Software (NYSE: MNS), Forest City Enterprises (NYSE: FCE.A), (NYSE: FCE.B), On2 (AMEX: ONT), Regal Beloit (AMEX: RBC), Media General (AMEX: MEG.A), eMagin (AMEX: EMA), Psychemedics (AMEX: PMD), and Global Light Telecommunications (AMEX: GBT).

It's an eclectic collection of companies that includes everything from a gas titan to a broadband technology penny stock. Progress is often obtained by climbing on the shoulders of strangers, and this is one strange bakers dozen of pioneers. A bigger heaping of decimal debutantes will come next month -- September 25 to be exact -- when 52 stocks, including Compaq (NYSE: CPQ) and Rule Breaker America Online (NYSE: AOL), make sense of cents.

So the days of cocktail party bragging rights for having bought AOL at $3 1/8 split-adjusted appear to be numbered. Yes, numbered. Penny stocks will begin trading in pennies. Calculators won't be needed to figure out that 7/16 is really $0.4375. Individual investors will be able to put their two cents in -- again, literally. But to these potential shareholders, these might very well become pennies from heaven.

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