What is a 'Tick Size '
A tick size is the minimum price movement of a trading instrument. The price movements of different trading instruments vary with the tick size representing the minimum incremental price movement that can be experienced on an exchange. The tick size increment is expressed in terms of dollars within U.S. markets.
BREAKING DOWN 'Tick Size 'Tick sizes dictate the minimum standards at which the price of a particular security can move. If a stock had a tick size of $0.50 and a current price of $20, the associated price can move to $20.50, but cannot move to $20.25. Tick sizes can be increments that do not exist in physical currency, such as notes and coins. For example, the New York Stock Exchange (NYSE) had a set tick size of $0.0625 in the year 1997.
Examples of Tick Size
If the minimum price movement of a stock is 0.01; the stock has a tick value of one cent (each tick is worth one cent for one stock). Futures markets typically have a tick size that is specific to the instrument. For example, the Russell 2000 e-mini futures contract (TF) has a tick size of .10; the value of each tick is $10.00 (each contract is worth $100 multiplied by the index). The e-mini S&P 500 contract has a tick size of .25 with a tick value of $12.50; each time price moves .25 (from 1110.50 to 1110.75 for example) the value changes $12.50, either up or down depending on the direction of the price movement.
SEC Tick Size Pilot Plan
In 2014, the U.S. Securities and Exchange Commission (SEC) instituted a pilot plan to widen the tick sizes of selected small capitalization stocks in order to promote a change in how these stocks were traded within the market. The plan widened the associated tick sizes of securities issued by smaller organizations and looked to examine the effect of tick sizes on liquidity.
The securities included in the program would have a minimum tick size of $0.01 and would be applied to companies with a market capitalization of no more than $5 billion, a daily trading volume of no more than one million shares on average, and a price of at least $2 per share.
In order to gather relevant data, a control group was selected along with three test groups. Each test group was comprised of 300 securities selected to provide a representative sampling. The SEC order required data to be transmitted from the Financial Industry Regulatory Authority (FINRA) and the associated exchanges to monitor shifts in activity relating to the changes set forth in the pilot plan.