What is 'Decimal Trading'

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 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. Since decimalization, all quotes appear in the decimal trading format.

BREAKING DOWN '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.

The place value for decimalization can vary by securities. All types of exchanges use market makers to facilitate the trading of securities among participants. Market makers quote bid and ask prices based on the decimalization rules outlined for specific securities. Overall, decimalization impacts the spread a market maker will make from a trade and the price movements that occur for security trades.

Bid-Ask Process

Market makers seek to match buyers and sellers on an exchange. They seek to facilitate the orderly exchange of securities while also generating a profit from the bid-ask spread. While the introduction of decimalization in the market created more easily comprehensible quoting, it also presented some challenges.

Generally decimalization causes tighter spreads since it causes smaller price movements. For example, prior to decimalization, one-sixteenth (1/16) of $1 was the minimum price movement represented in a price quote, equal to $0.0625. With tighter spreads market makers lose some of their opportunity to receive higher profits.

Decimalization also initially allowed for some traders to use sub-penny quoting to their advantage. With sub-penny quoting, traders could move ahead of other participants simply by quoting prices in sub-penny decimals. In 2005, the Securities and Exchange Commission introduced Rule 612, also known as the Sub-Penny Rule, in response to this issue. 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. The two decimal point quoting structure works in favor of market makers creating greater profit opportunities from spreads.

Pips and Forex Quotes

Pips are the equivalent of 1/100, one basis point or $0.0001. Securities with prices less than $1 can see incremental changes in pips. The foreign exchange market also broadly uses a four decimal quoting system which leads to the application of pips.

RELATED TERMS
  1. Pip

    A pip is the smallest price move that a given exchange rate makes ...
  2. Sub-Pennying

    Sub-pennying is a practice where brokers, dealers or high-frequency ...
  3. Quoted Price

    A quoted price is the most recent price at which an investment ...
  4. Inside Quote

    Inside quotes are the best bid and ask prices offered to buy ...
  5. Ask

    The ask is the price a seller is willing to accept for a security. ...
  6. Market Maker

    A broker-dealer firm that accepts the risk of holding a certain ...
Related Articles
  1. Personal Finance

    Small Cap Stocks' Pricing Overhaul

    With SEC approval, up to 1,200 U.S. stocks will now have their prices quoted in increments of 5 cents, rather than 1 cent. Is this good for investors?
  2. Trading

    NYSE Suspends Trading on Amazon, Google Over Data Glitch

    The NYSE suspended trading on five symbols, including Amazon and Google, due to a price scale coding issue.
  3. Investing

    Understanding the ticker tape

    Here, we'll explain the meaning and use of that reel of symbols whizzing across your TV or computer screen.
  4. Trading

    How to pay your forex broker

    Three types of commissions are used in this market. Learn how to get the best deal.
  5. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  6. Trading

    Top 6 questions about currency trading

    Here, we'll answer six of the primary questions about forex trading, commissions, and other related queries.
  7. Trading

    Market Makers Vs. Electronic Communications Networks

    Learn the pros and cons of trading forex through these two types of brokers.
  8. Trading

    How leverage is used in forex trading

    The use of leverage in forex trading is often likened to a double-edged sword, since it magnifies both gains and losses.
RELATED FAQS
  1. What is the name of the currency in New Zealand?

    The New Zealand currency is known as the New Zealand dollar. The currency was decimalized in 1967, and divided into 100 parts ... Read Answer >>
  2. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
  3. What are the determinants of a stock's bid-ask spread?

    Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the ... Read Answer >>
  4. How Does a Company Get Listed on the OTCBB?

    Learn about the stipulations for companies quoted in the over-the-counter bulletin board (OTCBB) service as over-the-counter ... Read Answer >>
  5. What's the difference between bid-ask spread and bid-ask bounce?

    Understand the difference between the bid-ask spread that determines the buy or sell price for a stock and a bid-ask bounce, ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center