Pieces of 8! Pieces of 8!

Pieces of 8! Pieces of 8!

My positing on Trump having no cents stirred the memory of the dollar being denominated not in 100ths but in 8ths. Remember 2 bits, 4 bits, 6 bits, a dollar? Did you ever get your 2 bits worth? A quarter is two bits. Confused? Its all because of the Spanish pieces of eight where the Spanish dollar was valued at 8 reales. All of this stemmed from when the Spanish were the dominant sea power in the 1500s and its coinage dominated the western world. In America the currency of the colonies during the 1600s and the 1700s was the Spanish dollar. To change the Spanish dollar it was divided in to “bits” rather than reals. Hence 2 bits was a quarter.

Visions of Robert Louis Stevenson’s Treasure Island came unbidden. Remember Long John Silver’s parrot, Captain Flint always screeching ‘Pieces of eight! pieces of eight!’? Some might remember Roger Miller’s King of the Road Ah, but two hours of pushin’ broom buys an / eight by twelve four-bit room. Or Langston Hughes’Six Bit Blues.

Gimme six-bits’ worth o’ ticket
On a train that runs somewhere.
I say six-bits’ worth o’ ticket
On a train that runs somewhere.
I don’t care where it’s goin’
Just so it goes away from here.

The US started minting coins with the Coinage Act of 1792 and created the US dollar denominated in 100ths rather than 8ths. However, the coins of the Old World dominated trade and Spanish and British coins were at first more accepted than the nascent US dollar. Ironically, 1792 was also the year that the first US stock exchange was founded. Not surprisingly the market trades were based on those in Europe which traded stocks in 1/8ths. The problem for the investor/trader is fractions have to be converted into decimals. How many shares of stock at 4 3/8 you can purchase for $4,375?

This system hung on until 2000. In 1997 Congress passed the Common Cents Stock Pricing Act and with it the decimalization of the stock market starting in August 2000. One of the immediate advantages of the switch was that the minimum spread on stocks was reduced to a penny rather than 12.5 cents under the old system. For many traders the large spread offered gains in times when the markets were inefficient. The lucrative spreads between bid and ask would diminish as the minimum spread was reduced from 12.5 cents to a penny – causing a resistance to switch.  Does Trump know about this?

Although stocks trade in decimals, bonds, notes and Treasuries still trade in 8ths, 1/32nds. 1/64ths and 1/128ths. Treasuries and futures based on U.S. Treasuries trade in points and fractions of points (1/32).  But when doing any mathematical calculations, we must first convert from 1/32 to decimals, do the calculation, then convert back to 1/32 price convention. Sometimes the trades are in 64ths and 128ths – again divisible by 8.

Here is a bond quote from the New York Fed:

ISSUE                                      BID             ASK            CHANGE      YIELD

6 ½.  8/15/30-N  10/20         105.08       12              +3              5.57

This is a Treasury bond (actually a Treasury note – it has a maturity less than 10 years) that has a 6 ½ percent coupon that matures on August 15, 2030. The bid is $105 and 8/32nds of a dollar per $100 of face value. The ask is $105 and 12/32nds. 10/20 means it’s a $10 million bid on $20 million offered. The “change” is the change in the previous day’s price. The bond yield (“i” in the present value formular) is 5.57 and is lower than the coupon. The bond is trading at a premium.

This is actually part of a lecture that I am giving my class in Financial Markets and Instructions at the University of Tennessee. When I last taught 13 years ago students criticized me by saying “This is not a history course. This is not a political science course. This is not a physics course. This is not an English course.” I would say “Yes it is.”