The minimum trading increment is expected to tumble to a penny when the U.S. stock markets switch to decimal pricing next year. In stock trading, dollars and cents will replace the pricing of stocks in minimum fractions of one sixteenth of a dollar. For example, $20 1/4 would be expressed as $20.25.
At the start, decimal pricing is expected to be in minimum increments of a nickel. Later, the minimum increment is likely to be a penny on the most heavily traded stocks, trading pros say. Penny ticks will not dramatically increase the number of shares traded on Nasdaq and the listed markets, according to a study by SRI Consulting. But quoting and the number of trades will skyrocket, says the securities industry advisor. As a result, average trade sizes will drop by about 40 percent on both markets.
Quoting will increase because the number of price points within a dollar will increase from 16 today to 100 a year from now. Traders will have a wider range of quoting levels at which to place their limit orders. That goes for market makers' best bids and offers as well as day traders' orders on ECNs and the NYSE's SuperDOT system.
The number of shares associated with each quote is expected to decline as traders implement new risk strategies. Under today's teeny regime, limit order quotes bunch at only 16 levels. That means there is considerable size associated with each level. Penny ticks will allow traders to spread all that size out over potentially 100 levels.
So, the number of trades will increase and their accompanying sizes will drop as market orders execute at many more price points.
