What Is Tick Size?
Let me explain tick size directly: it's the minimum price change up or down for a trading instrument in any market. You should know that this varies depending on the asset you're dealing with. In U.S. markets, tick sizes are in dollars or cents, sometimes fractions. Stocks typically move in one-cent increments, while currencies use pips and rates use basis points. When traders talk about price changes, they often refer to them in ticks—it's a straightforward way to measure movements.
Key Takeaways on Tick Size
Understand this: tick size is simply the smallest price increment a trading instrument can have. It used to be in fractions, like 1/16th of a dollar, but now it's mostly decimal and in cents. For most stocks, it's $0.01, though sub-cent fractions can apply. In currency and fixed-income markets, you'll see pips and basis points as the tick measures.
How Is Tick Size Measured?
Today, tick sizes are generally in decimals, but that wasn't always the case. Up until the early 2000s, U.S. stock markets used fractions of a dollar. For most stocks, it was one-sixteenth, equaling $0.0625, with some at 1/8 or 1/32 for different liquidity levels. This system came from the old New York Stock Exchange, based on a Spanish trading model using base eight—think fingers on two hands minus thumbs.
In 2005, the SEC brought in Rule 612, the Sub-Penny Rule, mandating decimalization. It set the minimum tick at $0.01 for stocks over $1 and $0.0001 for those under. Now, all U.S. exchanges use hundredths effectively, making one cent the norm for most stocks, though the SEC has tested bigger ticks for less liquid ones.
Futures markets have their own tick sizes, often $1 minimum points. Take S&P 500 futures: they tick at 0.25. If the March contract is at $4,553.00, the next bid up has to be at least $4,553.25.
Tick Size Pilot Program
On October 3, 2016, the SEC started a two-year pilot to check if larger tick sizes helped stocks priced at $2 or more, with market caps of $3 billion or less, and average daily volume of 1 million shares or fewer.
They split small-cap securities into a control group and two test groups, each with about 400 securities in the tests and the rest in control.
The first test group used $0.05 ticks but kept trading at current increments. The second quoted and traded in $0.05, with a few exceptions. The third quoted in $0.05 but had rules against price matching without displaying the best price, unless excepted. Control group stayed at $0.01.
Results of the Tick Size Pilot
This was just a test, but some brokers and traders pushed back, saying $0.05 ticks boosted market makers' margins while hurting individual investors. A January 2018 white paper, 'Tick Size Pilot Plan and Market Quality,' showed test groups had wider spreads, more volatility, and less price efficiency than the control.
In July 2018, exchanges and FINRA gave the SEC a joint assessment. Ultimately, they didn't switch to nickel ticks, sticking with one-penny increments.
Pips and Forex Quotes
Pips are 1/100 of 1%, or 0.01%, serving as the tick size in forex. The market quotes to four decimals, like EUR/USD at 1.1257. Some brokers go to five decimals for fractional pips, say 1.12573, where 10 fractionals make a full pip. Pip value depends on the pair.
Tick Size Examples
Take stocks: If you buy 100 shares of ABC at $50, with a $0.01 tick, a five-tick move to $50.05 gives you 100 × $0.05 = $5 gain.
For futures: Buying one E-mini S&P 500 at $4,700.00, tick 0.25 points, multiplier $50 per point, one tick is $12.50. Five ticks to $4,701.25: 5 × $12.50 = $62.50 profit.
In forex: Buying 100,000 EUR/USD at 1.1200, pip 0.0001. Five pips to 1.1205: 5 × $0.0001 × 100,000 = $50 profit.
Additional Insights on Tick Size
Remember, tick size is the smallest price rise or fall possible, like 0.25 for S&P 500 E-mini with $12.50 value per tick.
For day trading, tick size affects liquidity, positions, and risks—higher ticks mean bigger per-tick moves, so you might size down. Pick what suits your strategy.
Ticks aren't the same as pips: pips are forex-specific smallest moves, ticks are general for exchanges.
In commodities, it's the smallest price for bids or orders.
The Bottom Line
Tick size sets the lowest price change increment for securities, standardized but varying by product. Smaller ticks tighten spreads, and markets have trended that way for efficiency.
