Trading in fractions is centuries old
NEW YORK The bids swirled around trading specialist James McDevitt as he matched buyers and sellers with stocks on the New York Stock Exchange trading floor.
The transactions were proceeding smoothly despite the jostling and almost-rhythmic yelling until one trader increased his offer for 1,000 shares of Hughes Electronics with a shouted phrase.
For the briefest moment, the bidding stopped and there almost was quiet in this one corner of the trading floor.
Then McDevitt responded.
"You mean teenie or a cent?"
"I apologize. I meant a penny," the trader answered.
A teenie is trader jargon for 1/16 of a dollar, or 6.25 cents. Hughes, like 100 other companies on the exchange, recently began trading in decimals with one-penny increments. In a trade of 1,000 shares, the difference between a penny and a teenie is the difference between $10 and $62.50.
That slip of the tongue isnt unique. Many traders are finding themselves literally at a loss for words due to a government order that U.S. markets convert all stock trading to decimals from fractions by April.
After 200 years of trading in halves, quarters, eighths, and more recently, 16ths, traders have developed their own language, including words like "teenie."
Now, some of that must be revised.
"Its a big deal," said trading specialist Richard Siletti, who, like McDevitt, works for Fleet Meehan Specialists Inc. on the NYSE. "Pennies have made it a little busier here than usual."
"Some of the traders have learned this quickly, others not so quickly," said Larry Scinto of Atomic Tangerine, a consulting firm that has studied the decimal transition for the Securities Industry Association. "Its a whole new language for market makers. A lot of these folks are still talking in fractions."
'Don't like decimals at all'
Not everyone is thrilled with the change.
"I dont like decimals at all," said Scott Brooks, a 30-year trading veteran on the NYSE floor, who describes the new system as cumbersome and confusing.
The Securities and Exchange Commission has given the markets until April 9 to switch stock and options trading to decimals from fractions. The idea is that decimals will be easier for individual investors to understand and make pricing for stocks more competitive.
The NYSE and American Stock Exchange have already converted their issues. The Nasdaq Stock Market is scheduled to begin phasing in decimals in March.
On the NYSE and AMEX, where speed and efficiency are paramount, coming up with a new lingo has been tricky. First, theres the matter of figuring out what to say and how to say it.
The term "teenies," for example, dates back to 1997, when the exchanges began trading stocks in increments of 1/16 for the first time. "Three sixteenths" quickly became "three teenths" and then "three teenies."
"A trader would say three teenies and youd know he was upping a bid by 3/16 of a dollar," said Myles Gillespie, president of Fleet Meehan Specialists.
But "teenies" are meaningless in decimal trading, where stocks can be traded in 1/100 or penny increments, so now traders have to find a new vocabulary that maximizes efficiency without compromising accuracy.
What happens, for example, if a bid for a stock is around $25 and a trader wants to increase the offer by 26 cents? Does he say 26, which might be confused with $26, or 26 cents to avoid confusion?
Some traders have taken to using the word "spot" to make clear theyre talking in decimals, saying "35-spot-4," for example, so its clear they mean 4 cents, not four teenies.
Theres also the issue of perception.
Relearning how to hear
Brokers used to hearing the number 8 and thinking "8/16," not "8 cents," have hesitated in some cases, worrying they were bidding too much money for a stock.
"It is confusing," said Brooks, the 30-year trading veteran.
He pointed to a trading slip that read $35.08 which under the fraction system would have been read as $35 and 8/16. To clarify that this order had been placed in decimals, the word "DECIMALS" had been stamped across the slip in bright red capitalized letters.
Concerns that traders have enough time to adjust to decimals motivated the NYSE and AMEXs gradual phase-in of the new systems, said James Panchery, a vice president with the Securities Industry Association.
There have been some "folks putting in orders and not knowing whether they were in fractions or decimals," acknowledges Scinto, the Atomic Tangerine consultant. But he believes those problems should subside with time.
Industry and exchange officials agree, pointing out that at least on the AMEX and NYSE trading hasnt been slowed or hurt by the phase-ins.
When the Nasdaq shifts into decimals, it will likely face similar challenges. Although it lacks a trading floor, its telephone and computer-connected market makers use a lot of the same terminology.
Traders and industry officials say a lot of the confusion is caused by the fact that fractions and decimals are still trading side by side. In less than five months, when everything converts to decimals, it should be a lot easier to sort out whats going on, they say.
And there may be a plus side for traders and other people who work on stock exchange floors. Decimalization may have made their jobs more important than ever, as brokerages, seeking the best prices for their clients, rely on them even more for updates on pricing. Apparently in an era of computers, theres still no substitute for having a flesh-and-blood person on the trading floor.
"Its very labor-intensive work," Michael Buek of the Vanguard Group recently told an industry conference. "Certainly well be doing a lot more business with floor brokers."
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