Teenies – What are Teenies in Securities Trading?

What are Teenies in Stock Trading?

Teenies were once the smallest measure of value in stock trading. Teenies were equal to one-sixteenth of one basis point.   In April 2001, the Securities and Exchange Commission ordered all U.S. stock markets to use decimalization. As a result, stock quotes switched from using fractions to the decimal system. Under the decimal system, a teenie is represented as .0625.  Prior to decimalization, teenies were the smalled amount by which a security’s price was quoted, priced, or traded.

However, decimalization moved trading standards to base ten rather than base eight.  As a result, teenies are no longer the smallest amount by which a security’s price can move. The new minimum is .01 or 1 cent. Because of this change, when traders refer to teenies, they now mean 1 cent.

Teenies and Historical Stock Prices

Pieces of eight

The Spanish silver dollar was commonly divided into eight parts.  As a result, the term pieces of eight became commonplace. This evolved from the method of counting on the hands, similar to the decimal system. The difference is that the decimal system uses the thumbs as part of the total of ten units.  This other system uses the thumbs to denote the total of the four other fingers. For example, a person would count to four on his fingers and use the thumb to indicate a total of four.  Then, he continued counting on the other hand. Two thumbs equaled eight. The Spanish silver dollar could be broken into two, four, or eight parts.  Hence the term pieces of eight.

How teenies evolved

When the U.S. stock market began, they based the stock values on one-eighth fractions. An interesting side effect was the way this influenced the spread. The spread is the smallest amount that a stock can change in value. With one-eighth fractions, the smallest spread was 12.5 cents. It may seem insignificant, but it could amount to a large sum when trading thousands or even millions of shares of stock. Eventually, the stock exchanges added sixteenths to cut the spread to 6.25 cents.  Teenies are equivalent to one-sixteenth of a dollar or 6.25 cents.

In 2001, the Securities and Exchange Commission ordered all U.S. stock markets to switch from using fractions in price quotes to decimals. Under this new system, a teenie is represented by .0625. With decimalization, a teenie is no longer the smallest amount by which a security’s price can move.  Nor, is it the smallest unit of security that can be traded. The new minimum is .01 cents. Because of this change, some traders now refer to teenies as 1 cent.

From teenies to decimals

In 1997, U.S. markets moved from the prior practice of quoting prices in eighths of a dollar to quoting in dollars and cents. In the book CNBC Creating Wealth: An Investor’s Guide to Decoding the Market, published in 2001, the authors describe a “teenie revolution” in the chapter titled “Revenge of the Small Investor.” The “teenie revolution” describes the pricing move to sixteenths from eighths, which means that the spread between the bid can be significantly narrowed. This, the authors said, was “predicted to save individual investors as much as $2 billion per year.” The authors concluded that the move to teenies, and then decimals, is a “win-win situation for individual investors and professional traders alike,” explaining that for both groups, trading would cost less overall. Furthermore, the benefits of this “teenie revolution” meant that professional traders would risk more capital, setting the stage for greater liquidity. (Source: investopedia.com)

Teenies – Tick Sizes – and Spreads

A tick is a measure of the minimum upward or downward movement in the price of a stock or security. A tick can also refer to the change in the price of a security from one trade to the next trade. Since 2001, the minimum tick size for stocks trading above $1 is one cent. A tick is the standard measurement upon which the price of a security fluctuates. The tick provides a specific price increment.  It is reflected in the local currency associated with the market in which the security trades.  It is the minimum by which the overall price of the security can change.

Prior to April 2001, the minimum tick size was a teenie, valued at 1/16th of a dollar.  This meant that a stock price could only move in increments of $0.0625. Under the rules of the U.S. Securities and Exchange Commission, ticks must now be based on hundredths. As a result, most stocks have a tick size of $0.01 or 1 cent.  This means that for all stocks trading above a dollar, the price moves in increments of 1 cent per share.  The introduction of decimalization has benefited investors through much narrower bid-ask spreads and better price discovery.  However, some argue it has made market-making a less profitable and riskier activity.