DEFINITION of 'Decimal Trading'
A system in which the price of a security is quoted using a decimal format rather than fractions. For example, a decimal trading quote would be $56.25; using fractions, the same quote would appear as $56¼. The U.S. Securities and Exchange Commission (SEC) ordered all stock markets within the U.S. to convert to decimals by April 9, 2001. Prior to 2001, markets in the United States utilized fractions in price quotes. Since decimalization, all quotes appear in the decimal trading format.
BREAKING DOWN 'Decimal Trading'
Decimalization has led to tighter spreads since smaller price movements can be accounted for. For example, prior to decimalization, one-sixteenth (1/16) of $1 was the minimum price movement represented in a price quote (this is equal to $0.0625).
With decimalization, the minimum price movement is 1 cent for stocks over $1, providing a greater number of price levels and allowing for tighter spreads between the bid and the ask levels for trading instruments.