Penny jumping is a trading tactic where an investor places a buy order for a security at a price fractionally higher than the current highest bid to move to the front of the order queue.
Mechanics of the trade
Most global stock exchanges operate on a price-time priority system. When multiple traders place buy orders at the exact same price, the exchange queues those orders chronologically. The first order placed is the first one filled. Penny jumping bypasses this time-based queue by altering the price variable. A trader increases their bid by the smallest allowable price increment, known as a tick, which instantly gives their order priority over the existing queue.
Traders utilize this method to ensure their orders execute before a large block of shares at the original bid price absorbs the available liquidity. By offering a slightly better price to sellers, the trader forces the exchange matching engine to route incoming sell orders to them first. The price difference is minimal, but the advantage in execution speed alters the order flow.
While the name of the strategy references a specific fractional currency, the mechanics apply to any market with a defined minimum tick size. The increment varies depending on the specific country and the local currency, whether the exchange prices assets in cents, pence, yen, or another unit. Automated algorithms and high-frequency trading firms routinely program their systems to execute these fractional price jumps to capture short-term market movements.
Example
Imagine fellow Elephants are trading shares of an international logistics firm. The current highest bid for the stock is 50.00, and there is a large volume of buyers waiting in line at this exact price. You want to buy shares immediately but you refuse to pay the higher asking price of 50.05. Instead of joining the back of the queue at 50.00, you submit a buy order at 50.01. Because 50.01 is the highest bid on the market, the exchange places your order ahead of all the other Elephants waiting at 50.00. You secure your shares from the next willing seller by increasing your bid by a single tick.