a stock trading practice done by stockbrokers to split a customer’s order and sell it at different prices. The prices usually derive from the bid price and the asking price.
How Ginzy Trading Works
When a stockbroker trades, his entire career depends on something called the bid-ask spread. The bid-ask spread is the difference between the price that a buyer is willing to pay for the stock and the price sellers are willing to accept. If a broker managed to sell a stock at their asking price or near it, they get more profit. Even the smallest increment could make a big difference because of the order size.
Those increments are called ticks. It’s the smallest increment in which a price can go up or down. According to Rule 612 of the Securities and Exchange Commission (SEC), the minimum tick size for stocks priced above $1 per share is $0.01, which means $2.012 is not a valid price for a stock. The stock price must go up or down in $0.01 increments; it's either $2.01 or $1.99.
Ginzy trading aims to sell one order at two different prices. One is at the bid price, while the other is at the asking price. The final price lies somewhere between the bid-ask spread. That final price will always be higher than the bid price, making it more enticing for the customers.
Example of Ginzy Trading
Imagine you’re trying to sell canned beans at a hypothetical supermarket. The canned beans' price is $5, but your customers only have $4 in their pockets. The bid-ask spread of the canned beans is $1. Your customers have two options to get the canned beans: Wait until they have more money or wait until the price goes down.
Let’s say the tick size in this hypothetical supermarket is $0.5. Because your customers are impatient and want to buy the canned beans as soon as possible, they want the price to be closer to $4. But you, as a seller, don’t want that to happen because selling your canned beans at $4 would mean a non-existential profit. Other brokers offer $4.5 per canned beans to their customers, but you offer $4.25 per canned beans. How do you achieve that low price without losing on profit? By doing Ginzy trading, splitting the order into two different prices.
Let’s say a customer orders 200 canned beans, and he wanted that $4.25 price tag. You have to split that order into two parts: The first part is 100 canned beans worth $4.5 apiece, the second part is 100 canned beans worth just $4. The final price will be $4.25 on average. Compared to your competitors, your price is $50 cheaper for your customers! Naturally, customers will flock to you en-masse. The sheer quantity of orders you’ll get from the lower price will pay back your $0.25 profit deficiency multiple times over.
History of Ginzy Trading
Ginzy trading was at its peak from 1980 to 2000. Back then, ticks were determined by fractions instead of decimals. As a result, tick sizes are relatively big, making brokers happy because they’d get more profits per share sold. But customers are often uncomfortable because big tick sizes mean more risk for the customers. The associated risk restricts the involvement of the customers in the trading market, which also affects the brokers.
The Commodity Exchange Act—a law that regulates trading activities—prohibits split-tick trading. So, how do brokers maintain customer engagement without breaking that rule? It is where Ginzy trading comes in. Technically, Ginzy trading doesn't split-tick trade since a split is only a byproduct of price averaging, but Ginzy trading violates other rules enforced by The Commodity Exchange Act, which is quoting different prices on the same order.
In the end, Ginzy trading is considered illegal and non-competitive by The Commodity Exchange Act. Furthermore, as time passes, various trading instruments had been reducing tick sizes to granular levels. In 2005, the Securities and Exchange Commission introduced Rule 612, also known as the Sub-Penny rule. The new rule states that the minimum tick size for stocks priced above $1 per share is $0.01. The new rule makes Ginzy trading inherently unfavorable, thus, forgotten.