• Wed. Feb 28th, 2024

Definition in Trading, Requirements, and Examples

What Is Tick Size?

Tick size refers to the minimum price movement of a trading instrument in a market. The price movements of different trading instruments vary, with their tick sizes representing the minimum amount they can move up or down on an exchange.

In U.S. markets, the tick size increment is expressed in terms of dollars or cents (or fractions thereof). Stocks generally trade in one-cent tick size increments, while currencies have tick sizes in pips and rates in basis points (bps). Analysts and traders describe price changes in terms if ticks.

Key Takeaways

  • Tick size is the minimum price increment change of a trading instrument.
  • Tick sizes were once quoted in fractions (e.g., 1/16th of $1), but today are predominantly based on decimals and expressed in cents.
  • For most stocks, the tick size is $0.01, but fractions of a cent may also occur.
  • “Pips” and “bps” are also tick sizes used in currencies and fixed-income markets.

How Is Tick Size Measured?

In modern trading, tick sizes generally have a basis of decimals. Up until the early 2000s, however, U.S. stock markets expressed tick sizes based on fractions of a dollar. For most stocks, that fraction was one-sixteenth, so a tick size represented $0.0625, although some stocks had 1/8 (for thinly traded stocks) and some 1/32 tick sizes (for more active and liquid issues). This somewhat ungainly fraction tick size convention originated with the early New York Stock Exchange (NYSE), which first modeled its measurements on a centuries-old Spanish trading system that used a base of eight, or the number of fingers on a person’s two hands—minus the thumbs since they aren’t considered fingers.

In 2005, the Securities and Exchange Commission introduced Rule 612, also known as the Sub-Penny Rule. Rule 612 requires the minimum tick size for stocks over $1.00 to be $0.01 while stocks under $1.00 can be quoted in increments of $0.0001. This process was known as decimalization. The U.S. Securities and Exchange Commission (SEC) now requires all U.S. exchanges to effectively use hundredths, which is why the tick size today is $0.01, or one cent, for most stocks, though it has recently experimented with larger tick sizes for some less liquid stocks.

Futures markets typically have a tick size that is specific to the instrument, with $1 minimum tick sizes known as “points”. For instance, one of the most heavily traded futures contracts is the S&P 500 futures contract. Its tick size is 0.25 That means if, say, the March contract’s current price is $4,553, and someone wanted to offer more for it, they would have to bid, at a minimum, $4,553.25 and not, say $4,553.05.

Tick Size Pilot Program

On Oct. 3, 2016, the SEC started a two-year pilot program to test the potential benefits of larger tick sizes for stocks with closing prices of $2 or greater, market capitalizations of $3 billion or less, and consolidated average daily volume of 1 million shares or fewer. The Tick Size Pilot Program period ended on Sept. 28, 2018, although data collection and reporting requirements were set to continue for six more months.

The test collected data, including the profit margins of market makers in these securities. As part of the test, the SEC separated a sample of small-cap securities into one control group and two test groups. According to the SEC, each test group included about 400 securities, with the remainder placed in the control group.

The first group in the test used tick sizes of $0.05, although stocks in this group continued to trade at their current price increments. The second group also quoted tick sizes of $0.05, and traded them only in these increments, although it included a small number of exceptions to this general rule.

The third group was quoted in $0.05 increments, with trades in $0.05 increments, although a rule prevented price matching by trading organizations that do not display the best price unless an exception applies. Securities in the control group continued to trade at $0.01 increments.

Results of the Tick Size Pilot

While it was merely a test, some retail brokers and traders criticized the study, arguing that a move to $0.05 tick sizes only benefited market makers by potentially raising trading margins at the expense of individual investors. A white paper on the plan, “Tick Size Pilot Plan and Market Quality,” released in January 2018, found that stocks in the test groups experienced an increase in spreads and volatility and a decrease in price efficiency, relative to stocks in the control group.

The exchanges and FINRA submitted to the SEC a publicly available joint assessment of the impact of the Tick Size Pilot in July 2018.

In the end, exchanges did not adopt the large nickel tick size in stocks, and remained at one-penny increments.

Pips and Forex Quotes

Pips are the equivalent of 1/100, one basis point, or 0.01%. The foreign exchange (forex) market uses a four-decimal quoting convention utilizing pips for the tick size.

For example, the EUR/USD may have a 1.1257 bid. Some forex brokers also offer fractional pip pricing, which is to the fifth decimal place. For example, the above quote could be further specified as 1.12573. There are 10 factional pips to a whole pip, representing 1/10 the value of a full pip. The value of a pip varies based on the currency pair being traded.

Tick Size Examples

Stocks: Trader A buys 100 shares of ABC stock at $50 per share. The tick size is $0.01 in most stocks today. The price moves up 5 ticks from $50 to $50.05. With 100 shares, Trader A sees a gain of 100 x $0.05 = $5.00.

Futures: Trader B buys 1 contract of the E-mini S&P 500 futures at $4,700.00. The tick size is in this futures market is 0.25 points and S&P Futures trade with a multiplier of $50 per point per contract, so one tick equals a$12.50 profit or loss per contract. Say the price moves up 5 ticks from $4,700.00 to $4,701.25. Trader B, therefore, profits 5 x $12.50 = $62.50.

Forex: Trader C buys 100,000 EUR/USD at 1.1200, representing 1 standard lot. The pip size is 0.0001. The price moves up 5 pips from 1.1200 to 1.1205. On 100,000 EUR, Trader C profits 5 x $0.0001 x 100,000 = $50.00.

Tick Size vs. Tick Value

The tick size is the minimum price increment by which an asset’s market prices can rise or fall.

The tick value is the dollar amount associated with such a change in price.

In the example above using S&P 500 e-mini futures, we can see that the tick size is $0.25 while the tick value would be $12.50 per tick.

Why Do Traders Need to Pay Attention to Tick Size?

For active traders, tick size is very important in determining liquidity as well as position sizing and potential risk/reward. For example, a high tick size means each tick change equates to a larger profit or loss. Traders may opt for smaller position sizes if the tick size is high.

Can Stocks Trade Between Tick Size?

Yes, stocks can indeed trade between the official tick size of $0.01. Orders can be priced in sub-penny increments if they are priced to execute against a particular hidden order or used in a retail price improvement program (where a retail investor’s order is executed at a slightly better price than the best available public quote). In dark pools (private exchanges for trading securities not accessible by the public investing community) and through internalization (where a broker might fill an order from their own inventory), transactions can sometimes occur at sub-penny increments–although these trades are not publicly displayed.

How Can I Calculate the Tick Size?

The tick size is set by the exchange on which the instrument is traded and can vary based on the type of instrument, its price, and the market it trades on. To find the tick size of the instrument you are interested in, search for its product specifications on the exchange(s) where it trades.

Why Do Exchanges Set Minimum Tick Sizes?

Tick sizes help maintain an orderly market. By standardizing the minimum price increments, tick sizes reduce price volatility caused by excessive price movements in very small increments.

A well-chosen tick size can balance liquidity and price discovery. If the tick size is too large, it can lead to a wider bid-ask spread, making trading more costly for investors. On the other hand, a very small tick size can result in a cluttered order book with minimal meaningful price differentiation, hindering efficient price discovery.

The Bottom Line

Tick size is the minimum allowed increment of a price change for a listed security, and is set by the exchanges. Different financial products have different standardized tick sizes. A smaller tick size allows for tighter bid-ask spreads, and the trend has been for implementing smaller tick sizes in many markets. For example, when U.S. stock markets shifted from minimum ticks of one-sixteenth of a point ($0.0625) to decimalization in the 2000s, the minimum tick became $0.05 and then $0.01 for most stocks. Today, due to mechanisms like retail price improvement and dark pools, customers can often see fills in stocks at sub-penny increments. Tick size can differ from the tick value (or the profit/loss experienced per tick) based on the tick size – so if a tick size is $0.05, a one tick change would result in a $5.00 difference for 100 shares of stock.

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