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 (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.
Key Takeaways
- Decimalization is the process of quoting stock prices in terms of decimal places.
- Decimal trading has been used across all U.S. stock exchanges since 2001 to better facilitate orderly and efficient trading.
- Prior to decimalization, the minimum spread was 1/16 of a $1, or $0.0625. After decimalization, the minimum spread is $0.01 for stocks over $1, and $0.0001 for stocks under $1.
- Rule 612, known as the sub-penny rule, 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.
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.
Decimal quotes are composed of a bid price and an ask price. Bids and asks may come from retail traders and investors, market makers, or institutional traders.
Bid-Ask Process
The difference between the highest bid and the lowest ask is called the spread. Generally, decimalization causes tighter spreads. 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. After decimalization, the minimum price movement is $0.01 for stocks over $1. Therefore stocks can now trade with a $0.01 spread instead of a minimum $0.0625 (or 1/16) spread.
Tighter spreads are typically favorable to most retail traders who want to get into or out of trades without paying a large spread. For traders and market makers who are attempting to "capture the spread" by routinely bidding and offering to snag small profits, decimalization reduced spreads and thus the profit potential of this strategy. That said, some traders do still use this strategy today, but primarily in regards to automated or algorithmic trading.
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.
Stocks that have lots of daily volume are likely to have lower spreads than stocks that have low volume. High-priced stocks are more likely to have larger spreads than lower-priced stocks. Volatile stocks also tend to have bigger spreads than low volatility stocks. The spread in any given security is based on the volume (number of participants), volatility, and the price of the stock.
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 uses a decimal quoting system utilizing pips. For example, the EUR/USD may have a 1.1257 bid. Some forex brokers also offer fractional pip pricing, which is to the fifth decimal place. For example, the above quote could be further specified as 1.12573. There are 10 factional pips to a whole pip, representing 1/10 the value of a full pip. The value of a pip varies based on the currency pair being traded.
Decimal Price Quote vs. Fractional Quote
Assume a stock like General Electric Company (GE), which has an average daily volume of over 50 million shares, is trading with a bid price of $9.37 and an ask of $9.38. This $0.01 spread is possible because of decimalization. Since the stock is trading above $1, the spread cannot be smaller than $0.01, although it could be larger. A larger spread may occur during times of heightened volatility, if the volume were to significantly decline over time, or if the price were to significantly increase.
Consider the same scenario before decimalization. The price quote might have been $9 5/16 by $9 3/8 (or 6/16), which is equivalent to a $0.0625 spread instead of the $0.01 spread above.
FAQs
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.
How does a decimal work? ›
A decimal number contains a decimal point. The decimal point shows where the fractional part of a number begins. To the left of the decimal point, we have the whole number part, and to the right we have the fractional part, made up of tenths, hundredths, thousandths, and so on.
What are decimals easily explained? ›
A decimal is a number that consists of a whole and a fractional part. Decimal numbers lie between integers and represent numerical value for quantities that are whole plus some part of a whole. Fractional form: In fraction form, we can write that there is one and one-half of a pizza.
What is the rule for decimals? ›
While adding decimal numbers, line up the decimal points of the given numbers and add the numbers. If a decimal point is not visible (i.e., whole numbers), the decimal is behind the number. Subtraction. Similar to the addition of decimal numbers, line up the decimal point of the given numbers, and subtract the values.
How much is a decimal worth? ›
The first digit after the decimal represents the tenths place. The next digit after the decimal represents the hundredths place. The remaining digits continue to fill in the place values until there are no digits left.
How much is 0.1 in trading? ›
One standard lot is typically 100,000 currency units of account base currency. There are smaller lot sizes, including mini (0.1 of a standard lot or 10,000 units), micro (0.01 of a standard lot or 1,000 units), and nano (0.001 of a standard lot or 100 units).
What are the four rules of decimals? ›
- Line up your decimal points.
- Add 0s after the decimal point so that all of the numbers have the same number of places after the decimal.
- Add as you would with whole numbers.
- Just move the decimal point down into your answer.
They are sometimes explained as being 'the numbers between numbers' – for example 6.5 is halfway between 6 and 7. In elementary math decimals fall into the same broad category as fractions and percentages – methods we can use to describe mixed numbers or non-whole numbers.
How to solve decimal? ›
TO ADD OR SUBTRACT DECIMALS:
1) Line up the decimal points vertically. Fill in any 0's where necessary. 2) Add or subtract the numbers as if they were whole numbers. 3) Place the decimal point in the sum or difference so that it lines up vertically with the numbers being added or subtracted.
What are the 4 types of decimals? ›
Decimal represents the integer Numbers as well as non-integer Numbers. Decimal contains the 4 types of Decimals that are terminating Decimal Numbers, non-terminating Decimal Numbers, recurring Decimal Numbers, and non-recurring Decimal Numbers.
Every fraction is a decimal.
A fraction is one whole number divided by another (but we can't divide by zero). Every fraction, small or large, positive or negative, can be written as a decimal. For example, 1/2 = 0.5, 1/3 = 0.333… and 1/7 = 0.142857142857… – where the '142857' repeats forever!
How do decimals work? ›
The decimal point shows where the fractional part of a number begins. To the left of the decimal point, we have the whole number part, and to the right we have the fractional part, made up of tenths, hundredths, thousandths, and so on.
How to calculate decimal value? ›
Using the decimal formula, the number of decimal places in the answer is equal to the number of zeros in the multiple of 10 in the denominator. A decimal can be converted into a whole number by multiplying it with 10 or a higher power of 10, which is equal to the number of decimal digits.
What does the decimal mean in money? ›
decimal currency | Business English
a currency that can be divided into smaller units by dividing by ten or a hundred. For example, in the US a dollar is divided into a hundred cents.
What is 0.5 R in trading? ›
For example, we may usually risk 1% of our account per trade, but maybe market conditions are poor so we reduce our position size to half. If the price hits our stop loss, now we are only losing 0.5% of our account. I would record this as a -0.5R loss.
Should I use decimal for money? ›
The go-to for any financial unit is decimal - it was designed for the purpose of holding a larger range of digits with higher precision.
How many decimal places is good? ›
Four decimal places are recommended by the "Generally Accepted Accounting Principles (GAAP)" to counteract rounding errors.
