What Is Tick Size?

Tick size is the minimum price change up or down of a trading instrument in a market. Its size for different assets traded varies. In U.S. markets, the tick size increment is in dollars or cents (or fractions thereof). Stocks generally trade in one-cent tick increments, while currencies have tick sizes in pips and rates in basis points (bps). Analysts and traders describe any price changes with ticks.

How Is Tick Size Measured?

In modern trading, tick sizes are generally in decimals. Until the early 2000s, however, U.S. stock markets expressed tick sizes in fractions of a dollar. For most stocks, that fraction was one-sixteenth, so a tick size represented $0.0625, although some stocks had 1/8 (for lightly traded stocks) and 1/32 tick sizes (for more active and liquid issues). This ungainly convention originated with the early New York Stock Exchange, which first 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—minus the thumbs.

In 2005, the Securities and Exchange Commission (SEC) introduced Rule 612, the Sub-Penny Rule. Rule 612 required decimalization with the minimum tick size for stocks over $1.00 as $0.01 and stocks under $1.00 as $0.0001. The SEC now requires all U.S. exchanges to effectively use hundredths, which is why the tick size today is one cent for most stocks, though the SEC has recently experimented with larger tick sizes for some less liquid stocks.

Futures markets typically have a tick size specific to the instrument, with $1 minimum tick sizes known as “points.” For instance, S&P 500 futures contracts, which are heavily traded, have a tick size of 0.25. This means if, say, the March contract’s current price is $4,553.00, and someone wanted to offer more for it, they would have to bid, at a minimum, $4,553.25.

Tick Size Pilot Program

On Oct. 3, 2016, the SEC began a two-year pilot program to test the potential benefits of larger tick sizes for stocks with closing prices of $2 or greater, market capitalizations of $3 billion or less, and consolidated average daily volume of 1 million shares or less.

The SEC separated a sample of small-cap securities into one control group and two test groups as part of the test. According to the SEC, each test group included about 400 securities, with "the rest in the control group. The first group in the test used tick sizes of $0.05, although stocks in this group continued to trade at their current price increments. The second group also quoted tick sizes of $0.05 and traded only in these increments, although it included a small number of exceptions to this general rule. The third group was quoted with trades in $0.05 increments, although a rule prevented price matching by trading organizations that do not 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 only a test, some retail brokers and traders criticized the study, arguing that a move to $0.05 tick sizes only benefited market makers by raising trading margins at the expense of individual investors. A on the plan, “Tick Size Pilot Plan and Market Quality,” released in January 2018, found that stocks in the test groups increased in spreads and volatility and decreased price efficiency relative to stocks in the control group. The exchanges and Financial Industry Regulatory Authority submitted to the SEC a publicly available joint assessment of the impact of the Tick Size Pilot in July 2018. In the end, exchanges did not adopt the large nickel tick size in stocks, staying at one-penny increments.

Pips and Forex Quotes

Pips equal 1/100, one basis point, or 0.01%. The foreign exchange (forex) market uses a four-decimal quoting convention with pips for the tick size.

For example, the EUR/USD pair may have a 1.1257 bid. Some forex brokers also 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.

Tick Size Examples

Stocks: Trader A buys 100 shares of ABC stock at $50 per share. The tick size is $0.01 in most stocks today. The price moves up five ticks from $50 to $50.05. With 100 shares, Trader A sees a gain as follows: 100 × $0.05 = $5.00.

Futures: Trader B buys one contract of the E-mini S&P 500 futures at $4,700.00. The tick size in this futures market is 0.25 points, and S&P 500 futures trade with a multiplier of $50 per point per contract, so one tick equals a $12.50 profit or loss per contract. Suppose the price moves up five ticks from $4,700.00 to $4,701.25. Trader B, therefore, profits as follows: 5 × $12.50 = $62.50.

Forex: Trader C buys 100,000 EUR/USD at 1.1200, representing one standard lot. The pip size is 0.0001. The price moves up five pips from 1.1200 to 1.1205. For 100,000 EUR, Trader C profits as follows: 5 × $0.0001 × 100,000 = $50.00.

The Bottom Line

Tick size is the lowest allowed increment of a price change for a listed security set by the exchanges. Different financial products have different standardized tick sizes. A smaller tick size allows tighter bid-ask spreads, and the trend has been for implementing smaller tick sizes in many markets. For example, when the U.S. stock market shifted from minimum ticks of one-sixteenth of a point ($0.0625) to decimalization in the 2000s, the minimum tick became $0.05 and then $0.01 for most stocks. Today, due to mechanisms like retail price improvement and dark pools, customers often see stock fills at sub-penny increments. Tick size can differ from the tick value (or the profit/loss per tick) based on the tick size. So, if a tick size is $0.05, a one-tick change would result in a $5.00 difference for 100 shares of stock.