Decimalization

Individuals haven't really been in love with stocks for most of the last decade. While the lack of annualized return is mostly blamed for this, I also think one of the chief culprits is volatility. Traders love volatility but individual investors hate it. They're really not in the business of seeing their assets decline 10-15% in relatively short periods of time. They also have a hard time understanding how something can be worth x on one day and then y (often lower) just a few days later.

Individuals and most investors have no real appreciation for the mechanics of how stocks are bought and sold. That is most don't understand what happens when the buy and sell buttons are pushed. There has to be somebody on the other side of their trade. In the old days that function was mostly performed by specialists and market makers. In the old days however stocks traded in 1/8s to 1/4s. There was money to be made in market making so there was an incentive to stabilize prices and to handle large blocks of stock.

Decimalization did away with all that. Today there's no money to be made on the spread for firms and therefore no incentive to stabilize markets. As a result stocks trade down to their own levels. That's one of the main reasons why when sell-offs occur they tend to be much more intense and violent than they were in the past. Today's chart shows that action. This is a yearly chart of the S&P 500 showing when decimalization came into effect. Stocks have gone on wild swings since this happened and volatility is now much higher than it was ten years ago.

*Long ETFs related to the S&P 500 in client and personal accounts.