Tick Size
What Is Tick Size?
Tick size refers to the minimum price movement of a trading instrument in a market. The price movements of different trading instruments change, with their tick sizes representing the minimum amount they can move up or down on an exchange.
In U.S. markets, the tick size increment is expressed in terms of dollars or cents. Stocks generally trade in one-cent tick size increments, while currencies have tick sizes in pips, and rates in basis points (bps).
How Is Tick Size Measured?
In modern trading, tick sizes generally have a basis of decimals. Up until the early 2000s, however, U.S. stock markets expressed tick sizes based on parts of a dollar. For most stocks, that division was one-sixteenth, so a tick size represented $0.0625, albeit some stocks had 1/8 (for thinly traded stocks) and some 1/32 tick sizes (for more active and liquid issues). This somewhat ungraceful portion tick size convention originated with the early New York Stock Exchange (NYSE), which previously modeled its measurements on a centuries-old Spanish trading system that used a base of eight, or the number of fingers on a person's two hands — less the thumbs since they aren't considered fingers.
In 2005, the Securities and Exchange Commission introduced Rule 612, otherwise called the Sub-Penny Rule. Rule 612 requires the minimum tick size for stocks over $1.00 to be $0.01 while stocks under $1.00 can be quoted in increments of $0.0001. This process was known as decimalization. The U.S. Securities and Exchange Commission (SEC) presently requires all U.S. exchanges to effectively use hundredths, which is the reason the tick size today is $0.01, or one cent, for most stocks, however it has recently experimented with larger tick sizes for some less liquid stocks.
Futures markets ordinarily have a tick size that is specific to the instrument, with $1 minimum tick sizes known as "points". For instance, one of the most heavily traded futures contracts is the S&P 500 E-mini. Its tick size is 0.25, or $12.50. That means if, say, the March 2021 agreement's current price is $2,553, and someone wanted to offer more for it, they would have to bid, at a minimum, $2,565.50. However, other index futures can move just $10, and some $5.
Example of Tick Size
On Oct. 3, 2016, the SEC started a two-year pilot program to test the potential benefits of larger tick sizes at stocks with closing costs of $2 or greater, market capitalizations of $3 billion or less, and consolidated average daily volume of 1 million shares or fewer. The Tick Size Pilot Program period ended on Sept. 28, 2018, despite the fact that data collection and reporting requirements were set to continue for six more months.
The test collected data, remembering the profit edges of market makers for these securities. As part of the test, the SEC separated a sample of small-cap securities into one control group and two test groups. As per the SEC, each test group included around 400 securities, with the remainder placed in the control group.
The main group in the test used tick sizes of $0.05, despite the fact that stocks in this group continued to trade at their current price increments. The second group likewise quoted tick sizes of $0.05, and traded them in these increments, in spite of the fact that it included a small number of exceptions to this general rule.
The third group quoted in $0.05 increments, trades in $0.05 increments, however a rule prevented price matching by trading organizations that don't display the best price unless an exception applies. Securities in the control group continued to trade at $0.01 increments.
Results of the Tick Size Pilot
While it was merely a test, some retail brokers and traders criticized the study, contending that a move to $0.05 tick sizes benefited market makers by potentially raising trading edges to the detriment of individual investors. A white paper on the plan, "Tick Size Pilot Plan and Market Quality," released in January 2018, found that stocks in the test groups experienced an increase in spreads and volatility and a decrease in price efficiency, relative to stocks in the control group.
The exchanges and FINRA submitted to the SEC a publicly available joint assessment of the impact of the Tick Size Pilot in July 2018.
Pips and Forex Quotes
Pips are the equivalent of 1/100, one basis point, or 0.01%. The foreign exchange (forex) market uses a four-decimal citing convention using pips for the tick size.
For example, the EUR/USD may have a 1.1257 bid. Some forex brokers likewise offer fractional pip pricing, which is to the fifth decimal place. For example, the above quote could be further specified as 1.12573. There are 10 factional pips to a whole pip, representing 1/10 the value of a full pip. The value of a pip varies based on the currency pair being traded.
Features
- Tick size is the minimum price increment change of a trading instrument.
- Tick sizes were once quoted in divisions (e.g., 1/16th of $1), however today are predominantly based on decimals and expressed in cents.
- For most stocks, the tick size is $0.01, yet parts of a cent may likewise happen. "Pips" and "bps" are additionally tick sizes used in currencies and fixed-income markets.
