Let’s Trade Nickels

Posted by Jeff Carter
on October 29th, 2012

(Photo credit: Wikipedia)

Richard Grasso said this morning on CNBC that stocks should be traded in nickels, not pennies and sub-pennies. I have been stating that since I started this blog back in January of 2010. Why will nickels work better?

1. Because more volume will congregate on the bid/ask spread. Markets are so fragmented today and everyone is so afraid of being picked off that no one puts a big order out into the market. With .05 spreads, more volume will be attracted. In addition, the difference between a nickel and a penny isn’t that big when the all in price is considered-but it is a big deal to liquidity providers.

2. There is more room for commission. The brokers are getting squeezed and many forced to go out of business because of narrow spreads. While electronic trading puts customers closer to the market, they still need well functioning brokers to access that market.

3. Arbitragers get opportunity. Many arbitrage opportunities between options and futures have been shut down with pennies. This has impacted liquidity. By having a .o5 spread, they have a chance to try and execute sophisticated trading strategies between options and futures.

There are plenty of other things that we could do in the marketplace to make things better for everyone. Ending payment for order flow, ending internalization of order flow, banning dark pools, and banning dual trading would go a long way to leveling the playing field. Then speed wouldn’t matter as much, but the knowledge you programmed into your box would matter a lot.

As with other areas of the internet, content providers should win. In the stock market today, currently, the winners are the ones that can exploit the system. Calculated risk takers should be rewarded. Today, they are penalized.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.