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 trade to trade. Since 2001, with the advent of decimalization, the minimum tick size for stocks trading above $1 is 1 cent.
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 as $0.10 is below the minimum.
In 2014, the Securities and Exchange Commission (SEC) began a pilot plan to widen the tick sizes of selected stocks. This was done to promote changes regarding the trading activities surrounding selected small capitalization stocks, those with market capitalization levels not exceeding $5 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.
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. In this context, the uptick rule used to refer to a trading restriction that prohibits short selling except on an uptick, presumably to alleviate downward pressure on a stock when it is already declining. The uptick rule was eliminated by the SEC in 2007 but the financial crisis that started that same year had lawmakers second guessing that decision. Instead of reviving the old rule, the SEC created an alternative uptick rule which restricted piling on a stock that has fell more than 10% in a day.