Up until the year 2000, stock exchanges in the US quoted share prices in eighths. That meant the smallest increment that a stock could move was one-eighth of a dollar, nothing less. In the normal course of a trading day, one share of FedEx would trade hands at $14.125 or $14.25 but nothing in between. Why was this? The use of one-eighth increments isn’t ancient history, but the reason may as well be. You may think it had something to do with the common use of one-eighth increments in various imperial measurements. After all, inches are often divided into eighths; there are also eight pints in a gallon, and so forth. Perhaps all the country agreed spreads as small as one-eighth were good enough, and maybe for a time they were.
The real reason for the eighths convention goes back to the use of Spanish coins as America’s first widely accepted legal tender. Indeed, stock quote conventions weren’t the only legacy of the Spanish dollar on the US; Treasury bond quotes still use a similar convention. Even the dollar sign ($) has its roots in Spanish coins (see if you can spot the resemblance to the “Pillars of Hercules” on Spain’s flag today).
Spanish Dollar
We will return to what the Spanish dollar has to do with spreads of one-eighth on American stocks in a moment. But first, what exactly was the situation with American coinage around the time of the founding of the New York Stock Exchange in the 1790s? When it was created in the famous Buttonwood Agreement of 1792, the NYSE was the city’s first securities exchange. It was also only a month after the passage of the Coinage Act of 1792.
Under the Coinage Act of 1792, the US Mint was created as was the US dollar, which became the official currency of the new nation. However, the new currency was still quite young and not as widely accepted as the Spanish silver dollar which had served as the de-facto American currency before then. The reason for the use of a foreign currency was a long running shortage of minted coins in North America. The British colonies of North America, much like Britain itself, lacked gold and silver resources and the colonies also minted no coins. On top of that, British mercantilist policies meant the flow of gold and silver was steered to the mother country, not the colonies.
The result was that foreign coins, especially from Spain and its American colonies, were often used instead of any domestic ones. But what does this have to do with quoting stocks in eighths, you may ask. The answer lies in the fact that the Spanish dollar was composed of eight reales; it was also known as a ‘piece of eight’ for that reason. Therefore, because the commonly used currency was divided into eighths, it made sense that the pricing of stocks use eighths of dollar as the minimum ‘tick’ a stock could move by.
Stocks
So what became of the fractional pricing of stocks? In the age of computerized trading, the eighths system began to look like a burden for investors. For one, the system was less intuitive, but more importantly, it meant that one-eighth of a dollar became the lower bound on bid-ask spreads, limiting the potential gains that come from market liquidity and inflating trading cost.
Of course such costs are lucrative for some; dealers who profit from quoting different bid and ask prices would see their profits diminish if those spreads contracted. Instead of a dealer bidding $14.125 and offering $14.25 for a share of FedEx, and profiting from the difference, the spread might contract to a cent or two. In fact, in the pre-2000, pre-decimalization days, it was common for dealers to avoid quoting prices in ‘odd-eighths,’ opting instead for quoting bid and ask prices in fourths, a sign of anti-competitive collusion. This would have been especially important to the NASDAQ where more trades were conducted with dealers on the other end. Of course, quoting prices in fourths would have increased their spreads, and profits, further.
As a result of such entrenched interests on the side of the eighths system, it took legislative change to bring about decimalization as soon as 2000. In 1997, the US Congress passed the “Common Cents Stock Pricing Act;” later that year, trading in sixteenths began. In the autumn of 2000, the first few stocks on the NYSE, including FedEx, started trading in increments as small as a cent as part of a pilot run. Perhaps decades too late, decimalization had come.
Bonds
It wasn’t just stocks, everything from warrants and rights issues to US government bonds and Treasury futures were priced in fractions at one point. The latter two still are, albeit not in eighths but in 32nds. In some cases, even fractions of 32nds are used, bringing 64ths and even 128ths into use. Of course, by that point, the minimum increment in prices is smaller than one hundredth (or one cent on the dollar), so why bother? Your guess is as good as mine.
For those already knowledgeable about bond quotes, skip this, but to make this history of stock and bond pricing a little more hands-on for everyone else, let’s go over how this would work in practice. The New York Federal Reserve provides the following example; consider the bond quote below:
The issue part simply refers to the particular security for which the quote applies; in this case it is the 6 ½ percent coupon bonds maturing on August 15, 2005. The ‘N’ denotes that this ‘bond’ is technically called a ‘note,’ meaning it had an original maturity of less than 10 years.
But, it is the bid and ask prices where we see this pricing convention in action. You might read that “105.08” as saying that the ‘bond,’ or ‘note’ in this case, is trading at a premium at 105.08 cents per dollar of face value. However, the decimal point does not mean what it usually does here. Rather, it separates the full dollar portion of the price from the part in 32nds. The bid price above is actually $105 and 8/32nds of a dollar per $100 of face value. Similarly, the ask price is $105 and 12/32nds; the full dollar part of the price just carries over from the bid price since that part of the quote is the same (to save space on the ticker tape perhaps). The quote above also shows the change in price from the previous day’s price and the bond’s yield, which is lower than the coupon considering it is trading at a premium.
Note briefly that prices can get more granular than a 32nd of a dollar, as mentioned earlier. In some cases, you may see a bid or ask quote like this: “104.07+.” The plus sign means an extra 1/64th is added to the price. So here the price of this bond would be $104 and 7/32 plus 1/64, or simply $104 and 15/64.
Lesson
Beyond just being able to read Treasury bond quotes, I hope this history shared a little bit about the origin of the fractional pricing of financial instruments, such as stocks before the year 2000. It also hopefully revealed how convoluted finance was in early American history on account of having no universally accepted domestic currency. Relying on foreign money with various different fractional divisions meant adjusting financial dealings, including the trading of shares, to such currencies as the Spanish dollar.
Further Reading
1. “Why Does the Stock Market Use Fractions?” HowStuffWorks, 15 Apr. 2008.
2. Understanding U.S. Government Securities Quotes. Federal Reserve Bank of New York.
3. Ip, Greg. “Stock Prices Switch to Decimals From Fractions, Raising Concerns.” The Wall Street Journal, Dow Jones & Company, 28 Aug. 2000.
4. Maloney, John J. “Stocks: Why Fractions,?; Eighths A Plague For Both Man and. Computer.” NYTIMES.com, The New York Times, 28 Feb. 1971.
5. “Pieces of Eight.” Pieces of Eight : The Colonial Williamsburg Official History & Citizenship Site, The Colonial Williamsburg Foundation.
