Decimalization

Like decimation, only with numbers, prices on the U.S. stock exchange are given in dollars and cents: $12.25, $8.46, $45.19, etc. This is referred to as "decimal trading" (See: Decimal Trading). This structure may seem so obvious as to not require discussion. But it wasn't always this way.

In fact, for most of the history of stock trading in America, prices weren't given in decimals (meaning dollars and cents). Instead they were given in fractions. So prices were quoted in increments of 1/16: 12 1/4, 8 1/2, 45 3/16.

The system changed in 2001, after a few years of discussion and fair warning. The decimal system allows for a more fine-tuned system. More prices are available in a decimal system than in the fractional system (there are 100 ways to divide a dollar vs. 16 ways in the old system).

It also makes some gaming of the system that insiders used to accomplish less profitable, and therefore less likely.

The difference between 1/16 and 1/8 is about six cents. If a market maker or trader could get an advantage of 1/16 on a stock (the smallest price change possible under the old system) they could earn six cents per share. That profit may not seem like much, but if you are doing it on millions of shares, it can add up. However, under the decimal system, the smallest price change possible is a penny. That fact alone makes any shenanigans of one pricing unit six times less profitable.

The old system did lead to the interesting historical fact that some prices were available in previous decades that are not available today. For instance, 45 3/16 would be the equivalent of $45.1875, which today would just have to be rounded up to the far more prosaic $45.19.