What Is a Tick in Trading?
Let me explain what a tick really means in the world of trading. A tick is the smallest possible upward or downward movement in the price of a security. It's defined by the tiniest unit of currency on the exchange where that security is traded.
Take U.S. stocks as an example. Since 2001, when the SEC mandated decimalization for all stock markets, the minimum tick size for stocks priced above $1 has been one cent. This means stocks trade in one-cent increments. For currencies, ticks come in pips, and for rates, they're in basis points. As a trader or analyst, you'll often hear price changes described in terms of ticks.
Key Takeaways on Ticks
Here's what you need to remember: A tick is the smallest increment for trading a security. Post-2001 decimalization, it's one cent for stocks over $1. In 2016, the SEC ran an experiment raising the tick to five cents for 1,200 small cap stocks over two years to study impacts on trading. The results? Larger ticks cut down trading activity and bumped up costs.
Understanding a Tick
Think of a tick as the baseline for how a security's price can shift. It sets a fixed increment in the local currency of the market, dictating how the overall price changes.
Before April 2001, ticks were one-sixteenth of a dollar, so prices moved in $0.0625 steps. Decimalization changed that, giving investors tighter bid-ask spreads and better price discovery. But it also made market-making less profitable and more risky for those involved.
How a Tick Works
Different investments have their own tick sizes based on the market. For instance, the E-mini S&P 500 futures contract ticks at $0.25, and gold futures at $0.10. If an E-mini S&P 500 is at $20, a one-tick up move takes it to $20.25. It couldn't jump to $20.10 because that's below the minimum tick.
In 2015, the SEC greenlit a two-year pilot to widen ticks for 1,200 small cap stocks—those with about $3 billion market cap and under a million shares traded daily. Starting in October 2016, the goal was to check liquidity effects, and it wrapped up after two years.
Results of the SEC's Tick Size Pilot Program
Back in the mid-2010s, the SEC considered proposals to hike tick sizes, with some saying it would encourage brokers to focus more on small cap stocks, drawing in capital. But the 2016-2018 pilot showed otherwise: bigger ticks reduced liquidity and dropped stock prices by 1.75% to 3.2% for low-spread stocks.
This experiment cost investors $350 to $900 million and exposed the hurdles in updating regulations amid fast-changing markets, especially with discount brokers and online platforms rising. Trying to boost small cap interest via larger ticks didn't deliver, showing just how tricky market tweaks can be.
Tick as a Movement Indicator
Beyond increments, 'tick' can describe a stock's price direction. An uptick is a trade at a higher price than the last one, a downtick at a lower price.
That's why the SEC's uptick rule, active from 1938 to 2007 and revived in 2010 as an alternative, matters. It stops short sales without an uptick from the prior close, easing pressure on falling stocks. The 2010 Rule 201 kicks in after a 10% daily drop, allowing shorts only above the best bid and letting investors exit longs first.
Common Questions About Ticks
What about a tick in the S&P 500? U.S. stocks trade in one-cent ticks, so prices move by at least $0.01.
How does a tick differ from a point? A point is a bigger shift, like from $50 to $51—one point. A tick is smaller, to the right of the decimal, like $50 to $50.01—one cent tick.
Are ticks and pips the same? They're similar—both the smallest changes right of the decimal—but pips are mainly for forex, the tiniest unit an exchange rate moves.
What's time and tick in trading? It's a method for margin calls, using only open positions to figure if a day trade margin call is needed.
The Bottom Line
At its core, a tick is the smallest price step a security can take on an exchange, and it differs by market. E-mini S&P 500 futures tick at $0.25, gold at $0.10, and stocks over $1 at one cent. Remember, tick also signals direction: up for rising prices, down for falling.
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