Tick Size

What Is Tick Size?

Tick size is the minimum price increment at which a security can be quoted and traded. It defines the smallest possible change in a security's price and sets the floor for the bid-ask spread. For most US stocks, the tick size is one cent ($0.01), meaning prices can only move in one-cent increments.

Tick size is a fundamental parameter of market microstructure that affects trading costs, market maker economics, price discovery efficiency, and the viability of certain trading strategies. It is set by exchange rules and regulatory requirements.

How Tick Size Affects Markets

The tick size determines the minimum spread. If the tick size is one cent, the tightest possible bid-ask spread is one cent. For a $100 stock, this represents 0.01% of the price, which is negligible. For a $2 stock, one cent represents 0.5%, which is meaningful. This asymmetry means tick size has a disproportionate impact on lower-priced securities.

Market maker profitability is directly affected by tick size. Market makers earn the spread on each round trip, so a wider minimum tick provides a guaranteed minimum profit per trade. When tick sizes were reduced during decimalization, market maker margins shrunk, forcing changes in business models and the consolidation of market-making activity among fewer, more technologically advanced firms.

Queue priority at each price level becomes more competitive with smaller tick sizes. With penny increments, there can be enormous quantities of orders at a single price level, making it harder for any individual order to achieve priority and fill.

Tick Size Debates

There is ongoing debate about whether the one-cent tick size is too small for certain securities. The SEC Tick Size Pilot Program (2016-2018) tested whether wider tick sizes (five cents) for small-cap stocks would improve their market quality by making market-making more profitable and encouraging analyst coverage. The results were mixed, and the pilot was not made permanent.

Some argue that a one-size-fits-all tick size is suboptimal. Low-priced, illiquid stocks might benefit from smaller ticks, while small-cap stocks might benefit from wider ticks that incentivize market making. The optimal tick size balances trading costs for investors against the incentives needed to maintain healthy liquidity provision.