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Msg  47250 of 70113  at  3/2/2010 1:16:44 PM  by

Area51


 In response to msg 47244 by  Area51
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Re: ,,, four decimal places trading... additional information Q & A

From a Blog: 
Decimal points in placing limit orders on stocks
Q:  Why doesn't Questrade let me place Limit Orders on stocks beyond two decimal points, when on these same stocks they display the price wth 4 decimal points?
For example, I wanted to place a Buy Limit Order on a stock, and entered a limit price of 1.1533. The order was rejected, but a order at 1.16 was accepted.
They display the current price at 1.1533, so why couldn't I BUY it at 1.1533?
 
A:  A limit order doesn't guarantee a trade at an exact price. It guarantees that it'll be the price you specify, or better.

Similarly, when you place a regular buy order (as in a "market buy"), you won't necessarily get the price quoted. You'll get the price at which your broker executed the trade on your behalf.

So it's not really surprising that your broker doesn't take limit orders to four decimal places--doing so would be meaningless.

The story would be different if you were running a major program trading strategy, but you also wouldn't be asking your question here or using a discount brokerage if that were the case.
 
For stocks priced at $1 or above, there's an SEC rule that prohibits exchanges, trading systems, brokers, etc. from accepting any bids or offers that are priced in more than two decimal places. So, for a stock trading at $1 or above, your broker can't accept a limit order from you that is priced with more than two decimal places.

However, the rule doesn't prohibit executions with more than 2 decimal places. So, for example, a market buy order and market sell order could be executed at the midpoint between the current bid and offer prices, which may be in more than two decimal places. Also, a broker could pre-match a buy order from one customer and sell order from another customer at a price with more than two decimal places and then submit the transaction to the exchange for immediate execution.

In addition, certain trading systems could allow two institutional investors to negotiate a transaction on a private one-to-one basis, which could be priced with more than two decimal places and then submitted for immediate execution. The SEC has also granted some exemptions from the rule to facilitate similar sorts of institutional investor scenarios, but average retail investors probably wouldn't be able to get involved.

When any of the above kinds of transactions are executed, they would show up in your system as the last executed trade and would have more than two decimal places. However, the bid and offer prices in your system should not be showing up with more than two decimal places (if they are, then there's probably something I don't understand about the rules).

For stocks trading below $1, the rule allows orders to be priced in up to four decimal places. So the bid, offer, and last executed quotes showing up in your system for sub-$1 stocks could have up to four decimal places. If Questrade doesn't allow you to to enter limit orders of four decimal places for these stocks, that's just their policy. There are definitely other online retail brokers that allow it (I know that Scottrade and TradeKing allow it; others probably do too).




 
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