Why do we need trading to 5 decimals?

[ubuy2wron]

I noticed this AM that FFH is now trading in increments of less than a fraction of a cent actually in increments of 1/1000 of a penny. Am I the only one that thinks this is stupid and is likely taking place for all the wrong reasons?

[ItsAValueTrap]

It's four decimals?

 

Sub-penny front running... it's BS.  Here is one discussion on it:

http://quantinvestor.wordpress.com/2010/01/09/sub-penny-pricing-is-it-price-improvement-or-front-running/

 

is likely taking place for all the wrong reasons?

The front running can take place in different venues.

 

If you have a retail order, your order may go to a company such as Knight Trading or any of its copycats.  Your order rarely goes to an exchange.  The sub-penny stuff goes on there too but with negative rebates and sometimes the broker will just pocket the rebate.

 

If your order does end up going to an exchange, then there's the sub-penny stuff going on described on the quantinvestor wordpress site.  Those guys trade on exchanges.

Market makers (Goldman Sachs is the biggest) pay the exchanges money (or own the exchanges) and in return they get special advantages over everybody else.  Sub-penny pricing is one of them.  Note that institutional investors and other traders are not allowed to bid in sub-penny increments (there is some SEC ruling or letter that states this).

[ItsAValueTrap]

eBay is an example of an auction/bidding system with more integrity.  (Though eBay has fraud issues and a lot of stolen goods are sold on eBay.)

 

You have to beat the previous bid by a meaningful amount of money, unlike the stock exchanges.