Decimal Trading

"Decimal trading" is the trading of a security where the price is given in decimals. Tiny spreads relative to the old school venue of eighths and then sixteenths.

If you are under 35 years old, this might seem so obvious and natural that it's a little shocking to find out that such a thing even needs a name. However, in the U.S., decimal trading represents a relatively recent innovation.

The system went into place in 2001. Before that change, prices were given in fractions of a dollar. (See: Decimalization).

Why does it matter? Market makers get paid "on the spread"—that is, they'd be a buyer at $23 1/16th and a seller at $23 3/16, keeping 1/8 of a dollar for themselves for their troubles. The spreads were fatter and it enabled market makers to make bank on busy days with lots of volume.

But then pressure came via computer matching, so the sixteenths system went away and turned into what is essentially a hundredths system, where a given market maker might make only a few pennies between trades.