Friday, October 26, 2012

An Expensive Math Lesson

It's been eleven years since stock prices were quoted in fractions, e.g, $ 6 ⅞, and were fine-tuned to hundredths, e.g., $6.87 and $6.88.  The economic argument for the switch was clear:  a minimum tick-size of one-sixteenth, for example, often allowed a broker to capture a spread of 6.25 cents between the bid and the asked prices, while a one-penny increment meant that investors paid much less in commissions. It's no surprise that Wall Street wants the fractions to return, at least for low-cap securities. The ostensible reason is that higher profits will motivate brokers to use the equity markets to push the stocks of smaller companies, and these days it's all about helping the little guy.
If you move away from penny pricing, "investment banks will be able to make enough money trading…to write research and re-create the spark in the engine," said Jeffrey Solomon, chief executive of Cowen Group Inc., an investment bank focused on smaller companies.
Your humble observer has a jaundiced view about pay-me-more-so-I-can-help-you-more promises.  Such arguments are extremely self-serving, and the benefits rarely materialize.

Oh, well, in the old days of eighths we became pretty quick at converting fractions in our head, and sixteenths and even thirty-seconds made us expend mental energy.  A fractional revival should raise the math skills of the public, but it will be an expensive lesson.

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