BARRON'S: Barron's Mailbag: Bring Back Fractions

Originally posted by hedgez
obviously there are several reasons for the decrease in liquidity. i believe that the change to pennies is just one of the exacerbating causes.
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I wasn't singling you out for criticism, and it is very well possible this has truth to it, although i would argue the penny effect on liquidity is miniscule at best in comparison to other factors.

Pricing stocks in cents is more logical from the getgo- we only had eighths and quarters before because the system could not handle pennies. It's hypocritical to lament the passage of a structural inefficiency just because the old ways happened to benefit scalpers. Not much different than the luddites of old destroying textile mills or the USPS trying to stop fax machines in the 80's.

My strategy has 'evolved' to take advantage of the more precise moves that pennies allow. If we went back to quarters and halves, I would have to go back to the drawing board. This is not a complaint, but rather the foundation of an observation: we must adapt to change. If scalping does not work anymore, try something else.

This is a free country and a free forum so all have the right to whine and complain, but what's the point? Why not spend the time and energy on figuring out what works here and now instead of lamenting the past?

p.s. if traders are making less, specialists are making less, and brokerage houses are charging less, where is that money going if not in the pocket of the longer term investor? joe public will always be food for the larger predators, but if the smaller predators are having to satisfy themselves with smaller bites then surely it is to the public's benefit.
 
I don't care about replacing fractions with decimals, but I think that going to fractional pennies is just crazy. Also, I wouldn't mind a 5 cent price increment and 5 cent spread on stocks over $10/shr. Its no wonder that the specialists and the market makers just step out of the way whenever a news event happens rather than maintaining an orderly market, if they don't they just go out of business since their profit margins are so thin.
 
http://www.cfs.purdue.edu/class/sugato/research/decimalsVer3.02.pdf


basic conclusions if you don't feel like reading it:

1. decimalization is likely better for retail (small) traders who are able to execute share sizes at the tighter quoted spreads

2. effects of decimilization on institutionals are unclear but it appears their transaction costs have not been increased, suggesting available supply/demand outside the spread has not been diminished

3. decimilization contributes to larger players using limit orders less and market orders more, i.e. hiding their orders by not placing limits on the books until they get a visual, which means more liquidity is 'invisible' i.e. appearing out of nowhere (tougher game)

4. while volatility increased in short term due to change and adjustment, decimilization causes no apparent long term increase in volatility

5. while there is pressure for five cent increments over pennies from certain groups of Wall Street professionals, it is probably not warranted by the evidence

in other words, the retailers are getting a better deal and the big boys have gotten smarter about picking and choosing their entries at market/worked order rather than letting predetermined limits get picked off. since retailers and institutionals are the backbone of wall street, pennies are likely here to stay.

the wind blows cold for scalpers.

p.s. if Labranche is a hand over fist money machine why has their stock been cut in half from its March '01 high?
 
Originally posted by darkhorse
the wind blows cold for scalpers.
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lol...you know, if the market was on a tear right now, everyone would be like "oh! decimals are great! so much more liquidity, more money to be made, fairer markets, everyone benefits!!!"

but now since the markets are back to 'normal' levels and the days of any idiot making $ are over, it's like "decimals are bad, ok?!"
 
mathematically, so what. it's all just numbers. but pennying was impossible when the min increment was 1/8 or 1/16.

decimals stink, good markets or bad. imho. its a political thing. there was absolutely no good reason to change. other than sucking up to globalism.
 
Regarding liquidity, I think a good example of a market that doubled its minimum tick size (and cut the multiplier in half) and thereby increased liquidity is the (big) S&P contract. When it changed from a minimum tick of .05 to .10 it had the effect of dramatically reducing the amount of .5 to 1.0 spreads (that were prevalent and indicative of an illiquid market). The EMini S&P uses a minimum tick of .25 and it is arguably more liquid than the "big" S&P contract (although some might argue that the electronic marketplace has more to do with this than the tick size).

But I think the example of the "big" S&P contract's change in minimum tick size is a good case study for what might happen if the SEC mandated a .05 minimum tick in stocks. However, if I were handicapping the odds of that happening, I would say based on the recent actions taken to increase the hurdles for short-term traders that the SEC doesn't value the liquidity provided by short-term traders in stocks.

Right now the cry is to the brokers to provide sub cent pricing so that traders can step in front of whoever is stepping in front of their orders.
 
Originally posted by chasinfla
mathematically, so what. it's all just numbers. but pennying was impossible when the min increment was 1/8 or 1/16.

decimals stink, good markets or bad. imho. its a political thing. there was absolutely no good reason to change. other than sucking up to globalism.
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i think pennying is cool.

but maybe thats because i use it to my advantage by having professionals work my entries and exits.

sometimes it takes me as long as five minutes to ease into or out of a position, 'cause my boys are finessing it so i give up as little to scalpers as possible.

i am the ENEMY, muhahaha
(rubbing hands with glee, lightning and thunder crashing)
 
darkhorse, i'm surprised you're able to do so well in these difficult markets and have the time to post 591 times. i commend you.
 
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