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 generally are based in decimals, but up until 2001, U.S. stock markets expressed tick sizes based on an underlying system using fractions. For most stocks, that fraction was one-sixteenth, so the tick size was $0.0625. This is because the New York Stock Exchange first modeled itself 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 now requires all U.S. exchanges to use hundredths, which is why the tick size today is $0.01, although it is experimenting with larger tick sizes for some smaller-cap stocks.

Futures markets typically have a tick size that is specific to the instrument. For instance, one of the most heavily traded futures is the S&P 500 e-mini. Its tick size is $12.50. However, other index futures can move as little as $10, and some $5.

SEC Tick Size Pilot Plan

The U.S. Securities and Exchange Commission (SEC) started a pilot program in October 2016 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 test intends to collect data, including the profit margins of market makers in these securities. The SEC intends to make the information public during a two-year testing period.

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 includes about 400 securities, with the remainder placed in the control group.

The first group in the test uses tick sizes of $0.05, although stocks in this group continue to trade at their current price increments. The second group also quotes tick sizes of $0.05, and trades them in these increments, although it includes a small number of exceptions to this general rule. The third group quotes in $0.05 increments, trades in $0.05 increments, although a rule prevents price matching by trading organizations that do not display the best price, unless an exception applies.

Securities in the control group continue to trade at $0.01 increments.

While it’s merely a test, some retail traders already have criticized the study, arguing that a move to $0.05 tick sizes benefits market makers by potentially raising trading margins at the expense of individual investors.

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