Why Are Stocks Traded in Eighths?
For more than 200 years, stock prices on U.S. stock exchanges were quoted in eighths of a dollar. The move to a decimal system seems obvious but was resisted by the brokerage industry. The change from eighths to decimal was a big news event at the time but rapidly became part of how the stock market works.
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History
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The first coins accepted as a U.S. dollar were the Spanish silver eight-real coins, or "pieces of eight." The coins were often cut into eighths to make change. The eighths, or "bits," were commonly used until the Spanish coin stopped being legal currency in the U.S. in 1857. Formal stock markets started in the U.S. in the late 1700s and the eighth of a dollar was the smallest currency of the time.
The eighth remained the minimum price differential in stocks until 1997 when the New York Stock Exchange switched to an sixteenth spread. In 2000 Congress and the Securities and Exchange commission mandated a change to decimal pricing and in February 2001 the NYSE and American Stock Exchange switched to decimal trading. NASDAQ completed the transition in April of 2001.
Significance
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Trading stocks in eighths was profitable for market makers, or those brokers who facilitated trades between buyers and sellers. Acting as the middleman, they earned at least 12.5 cents or an eighth for each share of stock traded. Collecting an eighth on millions of shares of stock traded each day generated significant profits for Wall Street firms. The switch to decimal pricing allow stock to trade with spreads as small as one cent.
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Effects
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The result of the switch to decimal is a system that is easier to understand and financial pages simpler to read. Narrower stock spreads along with the market crash of 2002 reduced NYSE market maker revenues by 50 percent, and NASDAQ market makers saw a 70 percent decrease.
Benefits
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In 2005, the U.S. Government Accountability Office determined that the switch to decimal pricing had contributed to lower trading costs for individual investors. Options trading also switched to decimals with prices quoted in five-cent increments, significantly less that the 12.5 cents of the eighths.
Time Frame
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The U.S. stock markets were the last in the world to switch to decimal pricing. The Spanish "piece of eight" pricing hung on from the late 18th century until early in the 21st century.
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