"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.
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Finance: What Is a Basis Point?124 Views
finance a la shmoop what is a basis point?
well one percentage point is a hundred basis points, half a percentage is 50
basis points, five percentage points is? yeah we're gonna make you do that one on [frowning man talks to camera]
your own. well the basic idea is that in very large financial transactions those
involved need highly granular computation grids, and basis points
divid interest rates much more tightly. if a company borrows three billion
dollars just noting that the rate is four percent is really vague. it would
need to be noted as four point zero zero percent. why? because just one basis point [equation on screen]
i.e. one hundredth of a percent per year on three billion dollars borrowed
is still a lot of money. that is one basis point on three billion bucks is
300 grand .so basis points are a real thing in high finance transactions and [smiling man talk to camera]
okay okay the answer is 500 basis points. yeah all right now you can go back to
spinning this thingy. [man spins fidget spinner]