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Stocks used to be priced in eighths of a dollar. So if a stock was selling for $1.50, the next increment up was $1.625 and the next step down was $1.375. They
by allwein 16y ago
Stocks used to be priced in eighths of a dollar. So if a stock was selling for $1.50, the next increment up was $1.625 and the next step down was $1.375. They are now priced down to the penny, so a $1.50 stock can go directly to $1.51 or $1.49.
I'm not entirely sure why he cites this as a bad thing, but I'm assuming that there's some arbitrage opportunity to value investors when dealing with eighths of a dollar (since if a stock was priced at $1.50 but was really worth $1.55, you'd be getting $0.05 of "free" value by buying it).
- akashs 16y agoDon't know if it's in any way the cause of anything related to a decline in IPO, but this spread is what the banks make money on and what enables them to do what they do, effectively a measure of their margin on trades. Going from an eighth to a hundredth just means their margins effectively were reduced, but was probably a result of an increase in volume / trading activity.
- mdda 16y agoI think there is a couple of things going on here, though. Decimalization made stock market-making less profitable for Investment Banks. And the re-regulation of stock analysis prevents banks from using research analysts to tout stocks. By making it worth less to investment banks to invest in research, every customer has to invest more in research. Arguably this isn't too bad a problem - until it comes to smaller stocks, where the knowledge-base of the market is getting hollowed out - and liquidity dries up since no-one who is not in the stock has much incentive to do the initial research. The same thing happened in High Yield Bonds. The NASD (FINRA) brought in reporting system for bond prices (TRACE) that made trading bonds inherently less profitable for the middle-men (though much more transparent for investors). That meant that there was less incentive for the middle-men to do research, causing researchers to leave to join hedge-funds. So the end-game is a very fragmented market, where if an investor wants to sell a bond, they don't have an audience that's had any consistent commentary on the situation from a 'neutral' middleman.
- sedachv 16y agoTaken together with his other points, I think the author is under the impression that it was the "Boiler Room" operations peddling penny stocks that were driving IPOs. Trading in eights was probably good for brokers skimming money from transactions, but I can't see how decimalization can be considered bad for investors.