What Is a Tick in Securities Trading and How Does It Work?

What Is a Tick?

A tick is a measure of the minimum upward or downward movement in the price of a security. A tick can also refer to the change in the price of a security from one trade to the next trade. Since 2001 and the advent of decimalization, the minimum tick size for stocks trading above $1 is one cent.

Key Takeaways

  • A tick is the minimum incremental amount at which you can trade a security. Since 2001 and the advent of decimalization, the minimum tick size for stocks trading above $1 is one cent.
  • An experiment undertaken at the behest of the Securities and Exchange Commission (SEC) in 2016 increased the tick for 1,200 small-cap stocks from one cent to five cents for two years to test the effect of larger tick sizes on trading.
  • The SEC's experiment revealed that larger tick sizes decrease trading activity and raise trading costs.

Understanding a Tick

A tick represents the standard upon which the price of a security may fluctuate. The tick provides a specific price increment, reflected in the local currency associated with the market in which the security trades, by which the overall price of the security can change.

Prior to April 2001, the minimum tick size was 1/16th of a dollar, which meant that a stock could only move in increments of $0.0625. While the introduction of decimalization has benefited investors through much narrower bid-ask spreads and better price discovery, it has also made market-making a less profitable (and riskier) activity.

How a Tick Works

Investments may have different potential tick sizes depending on the market in which they participate. For example, the E-mini S&P 500 futures contract has a designated tick size of $0.25, while gold futures have a tick size of $0.10. If a futures contract on the E-mini S&P 500 is currently listed at a price of $20, it can move one tick upward, changing the price to $20.25 based on the $0.25 tick size minimum. However, with that minimum tick size in place, the price of the security could not move from $20 to $20.10 because $0.10 is below the minimum tick size.

In 2015, the Securities and Exchange Commission (SEC) approved a two-year pilot plan to widen the tick sizes of 1,200 small-cap stocks. This was done to promote research and trading in publicly-traded companies with market capitalization levels around $3 billion, as well as trading volumes below one million shares daily on average. The pilot looked to widen the tick size for the selected securities to determine the overall effect on liquidity.

The pilot program began on October 3rd, 2016 and ended just shy of its two-year expiration date on Friday, September 28, 2018.

Results of the SEC's Tick Size Pilot Program

According to an article by Bill Alpert in Barron's, called "Congress’ Failed Stock Market Experiment Cost Investors $900 Million," the idea for increasing tick sizes for small-cap stocks originated with David Weild IV, a former Vice President at NASDAQ who is informally known as the father of the JOBS Act.

Weild IV argued that because brokers, particularly smaller brokers, had lost money because of the diminishment of ticks spreads in 2001, they no longer put the time and effort into researching and promoting small-cap stocks. Increasing the tick size, he said, would be an incentive for brokers to look at these stocks again, and consequently more investment capital would flow to them, boosting their ability to grow their businesses, hire workers and grow the economy.

Weild's argument was circuitous and didn't convince regulators or observers. However, he did secure the support of Delaware Democrat John Carney and Wisconsin Republican Sean Duffy. Their co-sponsored bill passed the U.S. House of Representatives, prompting the Securities and Exchange Commission (SEC) to institute its program.

The results of the pilot program were clear: increasing the tick size for small stocks created "a significant decrease in liquidity in the limit order book" according to one paper, and "a stock price decrease between 1.75% and 3.2% for small spread stocks" according to another paper.

The project failed, according to Alpert, because of tectonic changes in stock markets in the 2000s and 2010s. The rise of discount brokers and DIY internet trading undermined the old system where "market-making was dominated by 'bulge-bracket' brokers with teams of bankers, analysts, and salesmen who worked the phones and got generous commissions on trades of institutions and individuals." The brunt of the increased costs of trading was borne by investors who paid somewhere between $350 and $900 million for the experiment.

Tick as a Movement Indicator

The term tick can also be used to describe the direction of the price of a stock. An uptick indicates a trade where the transaction has occurred at a price higher than the previous transaction and a downtick indicates a transaction that has occurred at a lower price.

The uptick rule (eliminated by the SEC in 2007) was a trading restriction that prohibited short-selling except on an uptick, presumably to alleviate downward pressure on a stock when it is already declining.

The financial crisis that started the same year that the uptick rule was eliminated caused lawmakers to second-guess their decision. Instead of reviving the old rule, the SEC created an alternative uptick rule which restricted piling on a stock that has fallen more than 10% in a day.

Article Sources
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  1. U.S. Securities and Exchange Commission. "SEC Roundtable on Decimalization," Page 2. Accessed July 5, 2021.

  2. U.S. Securities and Exchange Commission. "Assessment of the Plan to Implement a Tick Size Pilot Program," Page 5. Accessed July 5, 2021.

  3. U.S. Securities and Exchange Commission. "SEC Announces Order for Tick Size Pilot Plan." Accessed July 5, 2021.

  4. U.S Securities and Exchange Commission. "Division of Economic and Risk Analysis and Division of Trading and Markets." Accessed July 5, 2021

  5. Barron's. "Congress’ Failed Stock Market Experiment Cost Investors $900 Million." Accessed July 5, 2021.

  6. Journal of Banking & Finance. "Making Cents of Tick Sizes: The Effect of the 2016 U.S. SEC Tick Size Pilot on Limit Order Book Liquidity." Accessed July 5, 2021.

  7. Journal of Financial Economics. "The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment." Accessed July 5, 2021.

  8. U.S. Securities and Exchange Commission. "Regulation SHO and Rule 10a-1," Pages 2-3. Accessed July 5, 2021.

  9. U.S. Securities and Exchange Commission. "SEC Approves Short Selling Restrictions." Accessed July 5, 2021.

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