Tick size is the minimum price change up or down of a trading instrument in a financial market. The size of this increment varies across different types of assets.
In U.S. markets, tick sizes are usually expressed in dollars or cents (or fractions thereof). Stocks generally trade in one-cent increments, while currencies have tick sizes in pips, and interest rates are measured in basis points (bps). Analysts and traders frequently describe price changes using ticks.
Key Takeaways
- Tick size is the minimum price increment change of a trading instrument.
- Historically, tick sizes were quoted in fractions of a dollar but are now mostly in decimals and usually expressed in cents.
- For the majority of stocks, the tick size is $0.01, though fractions of a cent may also occur.
- Currency and fixed-income markets use tick sizes such as pips and basis points (bps).
How Is Tick Size Measured?
In modern trading, tick sizes are largely in decimals. Until the early 2000s, U.S. stock markets frequently used fractions of a dollar. For most stocks, one-sixteenth (or $0.0625) was the common tick size.
In 2005, the Securities and Exchange Commission (SEC) introduced Rule 612 (Sub-Penny Rule), requiring decimalization. The minimum tick size for stocks over $1.00 became $0.01, and for stocks under $1.00, it became $0.0001. Today, the tick size predominantly remains at one cent for most stocks, with the SEC experimenting with larger increments for less liquid stocks.
Futures markets typically have specific tick sizes for different instruments. For example, S&P 500 futures contracts have a tick size of 0.25. If, for instance, the current price is $4,553.00, and someone wants to bid higher, they would need to bid at least $4,553.25.
SEC Tick Size Pilot Program
On October 3, 2016, the SEC initiated a two-year pilot program to evaluate the benefits of larger tick sizes for small-cap stocks with specific criteria.
Results of the Tick Size Pilot
Despite promising a potentially beneficial adjustment, some retail brokers and traders argue that the study, aimed at increasing the tick size to $0.05, benefited market makers rather than individual investors. In January 2018, a white paper revealed increased spreads and volatility for stocks in the test groups, without significant improvements in price efficiency.
Eventually, exchanges chose not to adopt larger nickel tick sizes, maintaining the standard one-penny increments.
Pips and Forex Quotes
In the foreign exchange market, a pip equals 1/100 or 0.01%. Currency pairs use a four-decimal quoting convention for tick size. Some brokers offer fractional pip pricing, extending the decimal to five places.
For example, a EUR/USD quote may appear as 1.1257, but with fractional pip pricing, it might be 1.12573. The value of a pip varies depending on the currency pair being traded.
Tick Size Examples
Stocks: Trader A buys 100 shares of ABC stock at $50 per share. With a tick size of $0.01, a movement of five ticks from $50 to $50.05 results in a profit of 100 × $0.05 = $5.00.
Futures: Trader B buys one contract of the E-mini S&P 500 futures at $4,700.00. With a tick size of 0.25 and a $50 multiplier, each tick represents $12.50. Thus, a five-tick movement means a $62.50 profit: 5 × $12.50 = $62.50.
Forex: Trader C buys 100,000 EUR/USD at 1.1200. With a pip size of 0.0001, five pips from 1.1200 to 1.1205 yield a $50 profit: 5 × $0.0001 × 100,000 = $50.00.
Tick Size vs. Tick Value
While tick size refers to the minimum price increment, tick value is the monetary value of each tick. For instance, in the S&P 500 E-mini futures market, a tick size is 0.25, while its tick value is $12.50 per tick.
Why Do Traders Need to Pay Attention to Tick Size?
Tick size significantly impacts liquidity, position sizing, and risk/reward ratios. Higher tick sizes translate to larger profit or loss per tick, prompting traders to adjust their position sizes accordingly.
Can Stocks Trade Between Tick Sizes?
Yes, stocks can trade below the official tick size of $0.01. Orders may be priced in sub-penny increments under specific conditions, such as execution against a hidden order or within a retail price improvement program. In dark pools or through internalization, trades may also occur at sub-penny increments, although these prices are not publicly displayed.
How Can I Calculate the Tick Size?
Tick size is typically determined by the trading exchange and varies based on the type of instrument, its price, and the market it trades in. To find the tick size, consult the product specifications of the relevant exchange.
Why Do Exchanges Set Minimum Tick Sizes?
Exchanges set minimum tick sizes to maintain orderly markets. A balanced tick size can reduce volatility by preventing excessive price movements and enable efficient price discovery by balancing the bid-ask spread and ensuring meaningful price differentiation.
The Bottom Line
Tick size represents the smallest allowed price change increment of a listed security, as set by the exchanges. Different financial products have different standard tick sizes. Smaller tick sizes tend to allow tighter bid-ask spreads. The trend has been moving toward tinier tick sizes, and with mechanisms like retail price improvement and dark pools, customers often experience sub-penny pricing.
Tick size differs from tick value, which represents the profit or loss per tick. Understanding these nuances can significantly benefit traders in planning strategies and managing positions effectively.
Related Terms: Pips, Basis Points, Bid-Ask Spread, Market Capitalization.
