What Is Tick Size?
A tick size is the minimum price movement of a trading instrument. 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.
How Is Tick Size Measured?
Today, tick sizes generally are based in decimals. Up until 2001, however, U.S. stock markets expressed tick sizes based on an underlying system using fractions. For most stocks, that fraction was one-sixteenth, so a tick size represented $0.0625. This somewhat ungainly fraction stemmed from the New York Stock Exchange, 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 thumbs. The tick size for some thinly traded stocks was one-eighth, or $0.125.
The U.S. Securities and Exchange Commission (SEC) now requires all U.S. exchanges to use hundredths, which is why the tick size today is $0.01, or one cent, for most stocks, though it recently experimented with larger tick sizes for some smaller-cap stocks (see below).
Futures markets typically have a tick size that is specific to the instrument. For instance, one of the most heavily traded futures contracts is the S&P 500 E-mini. Its tick size is 0.25, or $12.50. That means if, say, the March 2019 contract’s current price is $2,553 (as it was as of Jan 7, 2019), and someone wanted to offer more for it, he’d have to bid, at a minimum, $2,565.50. However, other index futures can move as little as $10, and some $5.
Real World Example of Tick Size
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 in these increments, although it included a small number of exceptions to this general rule.
The third group quoted in $0.05 increments, trades in $0.05 increments, though 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.
- A tick size is the minimum price movement of a trading instrument.
- Tick sizes generally are based in decimals and expressed in dollars (on U.S. exchanges).
- For most stocks, the tick size is $0.01.
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 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.