This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
According to the new Federal Budget, the death of the penny is upon us. The penny has a completely different history and future in the trading world.
It was not that long ago (but before I began my capital markets career) that a new trading system thrust the legendary penny on to a bunch of traders who wanted nothing to do with it. Trading currently happens in pennies and fractions of a penny on some very inexpensive stocks. You can buy ABC at $25.34, right down to the penny. Trading actually used to occur in fractions of a dollar. Back then, when the spread was as close as it could be, it was more than a penny a part. About 6.25 pennies apart actually. Each $1 was divided up in to 16 parts and the stocks would trade in 16th’s. Previous to 1/16th spreads, trading happened with a minimum of a 1/8th spread. A dollar was divided up into only 8 parts and the spread was 12.5 cents. Trading the spread alone was exceedingly profitable.
This fractional system changed in 1996 when the TSX embraced the penny and went from trading with fractions to trading with decimals. This change introduced the now common practice of being able to “penny” the guy in front of you in the trading book. That is when you bid a penny higher or offer a penny lower than the best bid or offer in the book. To “penny’ is also referred to as ‘chiseling’. When there was an actual trading floor and this was done in person, it was rarely done twice. This move could prompt anything from a dirty look and dirty language to an elbow or even a punch.
Since trading occurs in firm offices all on computers now, only rarely does a trader in the same room, working for the same firm penny an actual colleague (yes, there are traders that are that rude/stupid), and thanks to HR, even rarer does this action result in the old school trading floor threat or action of physical violence.
Many older traders still hate the decimal system and trading in pennies. Most traders hate being ‘pennied’ and that type of behavior, but even with demise of the actual penny, I do not see the penny leaving the financial community. It is here to stay. Sorry old boys.