Daily Flash Fact: From Fractions To Decimalization, The Evolution Of Market Pricing

Did you know the stock market used to be priced in fractions? Beginning in 1792, going way back to when the New York Stock Exchange was created through the Buttonwood Agreement, fractions were used to price stocks.

The Buttonwood Agreement was enacted to eliminate auctioneers, and consolidate control of the market for publicly traded securities into the brokerage houses. At the time of this agreement, the U.S dollar was based upon the Spanish Real, as Spain was the most dominant market force in Europe at the time. This map of the United States in 1810 does a pretty good job of illustrating Spain’s influence during that period of history. As you can see, they controlled about 3/4’s of the U.S!

For centuries, the lowest fraction allowed was 1/8th, which is rooted from the Real being divided into 8 parts. Today this would probably surprise many day traders who are used to seeing an average spread of about 1 penny.

 As the velocity of the market increased with the advent of computers, people began to notice liquidity was being restricted. Also, fractions can be hard to mentally calculate. To solve this problem, the Common Cents Stock Pricing Act was introduced in 1997, which decimalized stock prices.

To read a more in depth report on decimalization, check out this Forbes article.

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