Decimal trading is a system in which the price of a security is quoted in a decimal format. The U.S. Securities and Exchange Commission (SEC) ordered all stock markets in the U.S. to convert from fractional quotes to decimal quotes by April 9, 2001. Prior to 2001, market price quotes in the United States were based on a fractional quoting system in increments of 1/16 of a dollar. Since decimalization, all stock quotes appear in the decimal trading format.
Commission Notice: Decimals Implementation Plan for the Equities and Options Markets
Understanding Decimal Trading
Decimal trading has been used across all U.S. stock exchanges since 2001 to better facilitate orderly and efficient trading. The use of decimals rather than fractions in price quotes is known as decimalization. Decimal quotes make prices more easily and immediately understandable for investors, market makers, and all other types of market participants. A decimal quote is $5.06, versus $5 1/16 in fraction format.
Another milestone came in 2001, two years after Reg. ATS, when stock exchanges started quoting stock prices in decimals instead of fractions. This “decimalization” of the exchanges changed the minimum stock tick size from 1/16th of a dollar to $0.01 per share and further encouraged algorithmic trading by ECNs. What this meant was that “overnight the minimum spread a market-maker stood to pocket between a bid and offer was compressed from 6.25 cents…down to a penny.” This move decreased a market-maker’s trading advantage and led to increased liquidity, which in turn eventually led to the current boom in algorithmic trading. In this more liquid market, institutional traders began splitting up orders according to their algorithms to execute trade orders faster and at a better average price.
THE RISE OF COMPUTERIZED HIGH FREQUENCY TRADING: USE AND CONTROVERSY
Sub-Penny Rule
In 2005, the Securities and Exchange Commission introduced Rule 612, also known as the Sub-Penny Rule. Rule 612 requires the minimum price increments for stocks over $1.00 to be $0.01 while stocks under $1.00 can be quoted in increments of $0.0001.