by Larry Goldfarb

The move to decimalization in the late 2000 roiled the markets and dislocated hundreds of brokers.  Fixed Income became the more profitable business line and firms started to use financial engineering to make those products more profitable.  The advent of the CDO was a byproduct of the migration toward fixed income.  The rest, as we say, is history. Another byproduct of decimalization is that firms did not strongly enough make markets in lightly traded stocks.  The rise in decimalization significantly reduced commissions and thus it was not worth a brokers while to facilitate a few hundred shares of a hard to find security.

The move would at least partly undo an 11-year-old rule that replaced fractions of a dollar in stock prices, like 1/8 and 1/16, with pennies. The idea of that change was to trim investors' trading costs: One-cent increments can lead to narrower gaps between the prices at which brokers buy and sell shares—potentially reducing their opportunity to shave off profits. Those championing the fraction's return say it would spur securities firms to buy and sell more shares of some companies by making it more profitable for them to do so. Opponents say fractions would increase trading costs for investors with little or no benefit to companies.

Discussions are still in the early stages and it is unclear what the Securities and Exchange Commission will ultimately decide. Furthermore, any change would affect only some smaller companies. "People are increasingly raising this idea with us directly," SEC Chairman Mary Schapiro said in an interview. "We will look at it, but there are obviously trade-offs." The push to revert to wider "tick sizes," as traders call them, comes amid an argument over whether or not decimalization has made markets less welcoming for small companies looking to attract investors to their initial public offerings of stock. Some executives, banks and advisers say that banks do less to drum up investor interest in these shares because of lower profits. As evidence, people in this camp point to the decline in the number of U.S.-listed company IPOs raising less than $50 million. In the late 1990s there were typically more than 100 such IPOs a year, compared with fewer than 10 so far this year, according to Dealogic.

To review more information, please read [WSJ, 10/27/12]