DEFINITION of 'Sub-Pennying'

A practice where brokers, dealers or high-frequency traders jump to the front of the line in the National Best Bid and Offer (NBBO), which is the highest posted bid and the lower posted offer for a trading instrument, by making a price improvement in 1/100th of a penny increments. This allows the transaction to be executed first and provides the best opportunity to capture the spread.

BREAKING DOWN 'Sub-Pennying'

Sub-pennying practices take fills away from investors who place orders on the National Best Bid and Offer. The Securities and Exchange Commission (SEC) in 2005 implemented Rule 612 or the Sub-Penny Rule. With an increase in algorithmic trading, programs had been created to automatically sub-penny the NBBO. The SEC noticed and adopted Rule 612 to address the problem. It specifies that the minimum pricing increment for stocks over $1.00 must be $0.01; stocks under $1.00 have a minimum pricing increment of $0.0001. The rule, however, only banned sub-penny quoting - and not sub-penny trading - and as such the problem of sub-pennying still exists.

  1. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee ...
  2. Penny Stock

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  3. Securities And Exchange Commission ...

    A government commission created by Congress to regulate the securities ...
  4. Best Bid

    The highest quoted bid for a particular trading instrument among ...
  5. Best Ask

    The lowest quoted offer price among all those offered by competing ...
  6. Bid-Ask Spread

    The amount by which the ask price exceeds the bid. This is essentially ...
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