InformationWeek

October 16, 2000

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Wall Street Goes Decimal

The U.S. financial markets are finally joining the rest of the globe in converting pricing to decimals

By Cheryl Rosen

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n a world of zeroes and ones and dollars and cents, there's still one industry that ties its pricing to pieces of eight, Spanish coins common in 1792, when the New York Stock Exchange opened. But not for much longer.

Wall Street is finally going decimal. The nation's stock exchanges and brokerage houses are spending nearly $1 billion on a massive IT project to move stock trading from the 18th century to the 21st. Following a Congressional mandate, all U.S. stock markets will give up those confusing eighths and sixteenths and join the rest of us in tying market pricing points to, well, points.

The move began earlier this year with seven stocks. Now, Wall Street's decimalization project includes 52 securities that are being bought and sold in pennies rather than fractions. By April, fractions will be banished from ticker tapes and streaming stock quotes nationwide--and worldwide, since the United States is the last country to make the shift.

Illustration by Richard Borge The benefit of using decimals is as easy to comprehend as the difference between 25-5/16 and 25.31. Spoken or typed, the numbers represent the distance from Old New York to today's digital marketplaces.

For the IT staffs at the nation's stock exchanges, the decimalization project is a monster. As big in scope as the year 2000 problem, it touches virtually every part of every system. It adds the drama of kicking up a big increase in trading volume, the size of which no one can really predict. Today, as a stock price moves from $5 to $6, traders have 16 prices at which to buy or sell. With decimals, that number will move to 100.

The Securities Industry Association estimates the shift to decimals will increase the number of stock trades by around 80%, while the number of quotes and messages going through the exchanges will nearly triple.

"Decimalization will allow a trader to step in front of another trader's deal for a penny," says Gregor Bailar, CIO and executive VP of operations and technology at Nasdaq. And since every stock price change causes dozens of changes in the options tied to them, option volume will increase more than 3,000%, the Securities Industry Association predicts.

Decimalization has been looming for a long time. In fact, some exchanges began thinking about it so long ago that they used their decimalization plans as the basis for their Y2K conversion. Those that tackled Y2K first are dusting off those blueprints and planning for a second major overhaul of their systems. Virtually all of them, however, are using this opportunity to do more than just convert to decimals and add capacity--they're attempting to build a technology infrastructure that will last through the next growth spurt and all the changes that a boom in online stock trading will bring.

While the decimalization project is a challenge for IT staff at exchanges and brokerage houses, it's turned into a bonanza for technology vendors. "Decimalization will increase the number of quotes dramatically, and all those quotes have to be propagated from the exchanges to the broker dealers and then into economic-analysis tools and risk-management tools. The applications need to be beefed up to keep up in real time," says Steve Katzman, securities and capital markets manager for Sun Microsystems' worldwide financial services division. "And because they have an absolute requirement never to go down, the exchanges like to use technology that's matured for a long time--and they define that as decades. So they tend to have older platforms and less modular software, and that makes it even harder to make changes."

Jumping through a three-century time warp isn't easy. It already has proven too much for Nasdaq. In March, Bailar had the unpleasant task of admitting to the Securities and Exchange Commission that Nasdaq couldn't meet the July deadline to begin trading in decimals. The New York Stock Exchange and American Stock Exchange began a pilot decimalization project by trading seven stocks in August and increased the number to 52 stocks in September. Nasdaq plans to begin trading 10 to 15 stocks in decimals in March.

The problem? Unexpected volume. Nasdaq was surprised by a boom in online stock trading combined with a record-breaking bull market for tech stocks. Before Bailar's decimalization mission was even due to begin, the processing power and storage capacity he had put on tap for it had disappeared.