Key takeaways
– Tick size is the smallest permitted increment by which a security’s quoted price can change.
– Different markets use different tick conventions: stocks in the U.S. trade in cents, futures in instrument-specific points, and forex in pips.
– Tick size affects spreads, liquidity, and the dollar risk per price move; traders should always convert ticks to dollar values before sizing positions.
– Regulators have tested larger tick increments (e.g., the SEC Tick Size Pilot) but U.S. equities remain largely quoted in one-cent increments.
Definition
Tick size is the minimum price change—up or down—that is allowed for a traded instrument on an exchange. When prices move, they move in multiples of the tick size. Market participants often describe price changes and liquidity in terms of “ticks.”
How tick size is measured (by market)
– Stocks (U.S.): Typically quoted in decimals; the standard increment for most U.S.-listed stocks is $0.01 (one cent).
– Futures: Each futures contract has a specified tick size and a contract multiplier; the dollar value of one tick = tick size × multiplier. Example: E‑mini S&P 500 futures have a 0.25 point tick and a $50-per-point multiplier, so one tick = 0.25 × $50 = $12.50.
– Forex: Uses “pips.” Most currency pairs are quoted to four decimals and one pip = 0.0001. Some brokers quote fractional pips to five decimals (1/10th pip). Pip dollar value depends on the pair and lot size.
– Rates and bonds: Often expressed in basis points (1 bp = 0.01%) or fractions specific to the instrument.
A brief history: fractions → decimals
Historically, U.S. stocks were quoted in fractions (e.g., 1/16 = $0.0625). In 2005 the SEC’s Rule 612 (decimalization/Sub‑penny rule) required exchanges to move to decimal pricing; most stocks now trade in $0.01 increments (and under $1 stocks in finer increments). Exchanges and regulators occasionally study alternative tick increments for liquidity reasons.
The SEC Tick Size Pilot (2016–2018)
– Purpose: Test whether wider ticks would improve market quality for certain small-cap stocks.
– Design: About 1,200 small-cap stocks split into a control group $0.01 ticks) and three test groups that used $0.05 quoting or had quoting restrictions intended to widen quoted spreads.
– Findings: Analysis and white papers reported that the test groups generally experienced wider spreads, higher volatility, and reduced price efficiency compared with the control group. Many market participants argued a nickel tick would mainly benefit liquidity providers (market makers) at the expense of execution quality for other investors. Exchanges ultimately did not adopt $0.05 increments broadly. (See SEC and FINRA assessments.)
Pips and forex quotes
– A pip is typically the fourth decimal place (0.0001) for most major currency pairs—e.g., EUR/USD = 1.1257 → pip = 0.0001.
– Some brokers quote a fifth decimal (fractional pip or pipette), making one pip = 10 pipettes.
– Pip value varies by pair and lot size. For a standard lot (100,000 units), one pip on EUR/USD ≈ $10 when USD is the quote currency.
Practical examples and how to compute dollar value
1) Stocks (per-share tick)
– Example: Buy 100 shares of ABC at $50.00; tick size = $0.01.
– Price rises 5 ticks to $50.05 → gain = 100 shares × $0.05 = $5.00.
2) Futures (tick × multiplier)
– Example: Buy 1 E‑mini S&P 500 contract at 4,700.00; tick = 0.25 point; multiplier = $50/point.
– One tick value = 0.25 × $50 = $12.50. If price rises 5 ticks (to 4,701.25) → profit = 5 × $12.50 = $62.50.
3) Forex (pip × units)
– Example: Buy 100,000 EUR/USD at 1.1200 (1 standard lot). Pip = 0.0001.
– Price rises 5 pips to 1.1205 → profit ≈ 5 × 0.0001 × 100,000 = $50.00.
Tick vs. pip vs. basis point
– Tick: the minimal price increment for an exchange-traded instrument.
– Pip: the standard minimal quote change in forex (usually 0.0001).
– Basis point: 0.01% (used commonly in interest rates and bonds). These terms overlap conceptually (all describe smallest quote increments) but are market-specific.
Why tick size matters
– Liquidity and spreads: Smaller ticks allow tighter bid–ask spreads; larger ticks can widen spreads and potentially increase costs for retail traders.
– Incentives: Larger ticks can raise per-trade profit opportunities for market makers, possibly changing quoting behavior and displayed liquidity.
– Risk per move: Tick size determines the dollar gain/loss for each minimal price movement and therefore affects position sizing and margin requirements.
What is the best tick size for day trading?
There’s no universally “best” tick size—choose instruments whose tick value matches your risk tolerance and strategy:
– If tick value is large (e.g., $12.50/tick in E‑mini S&P), you may need smaller position sizes or wider stop orders.
– If tick value is small (one-cent stocks for small share counts), scalping many ticks might require large position sizes to make meaningful profits.
– Prefer instruments whose typical spread, tick value, and volatility align with your trade frequency, account size, and risk per trade. Always convert ticks to dollar exposure before sizing positions.
Practical steps for traders: using tick size in your process
1. Check the instrument specs before trading
• Find tick size and contract multiplier in the exchange or broker specs (e.g., CME contract specs).
2. Convert tick to dollar value
• Stocks: dollar per tick = tick size × shares.
• Futures: tick value = tick size × contract multiplier.
• Forex: pip value = pip size × units traded (adjust for quote/cross currency).
3. Translate your risk tolerance into ticks
• Decide how many dollars you’re willing to risk per trade, then convert that to ticks to set stop-loss and position size. Example: If max risk $100 and tick value $12.50, you can tolerate 8 ticks (100 / 12.50 = 8).
4. Account for spread and execution costs
• Include the typical bid–ask spread (in ticks) and commissions/fees in your profit/loss calculus.
5. Use limit orders and smart order routing
• To avoid adverse costs from large spreads, prefer limit orders for passive entry/exit when appropriate.
6. Backtest and simulate with real tick granularity
• Backtest your strategy using the true tick size/price increments; sub‑penny or fractional assumptions will produce unrealistic results.
7. Scale positions to tick value
• If tick value is large, reduce contracts/lot size; if tick value is small, increase size carefully while respecting leverage and margin.
8. Monitor liquidity and market structure changes
• Exchanges may change tick rules or listing venues; for less liquid instruments, watch for quote instability and larger effective spreads.
9. Include slippage and latency in intraday systems
• In fast markets, actual execution can differ from displayed ticks; factor slippage into edge calculations.
10. Keep tax and regulatory considerations in mind
• Frequent trading may have tax implications; also be aware of exchange or broker-specific minimum increments.
Common trader tips
– Always compute dollar-per-tick before risking capital.
– For scalping, choose instruments with small spreads and predictable tick behavior.
– For larger account sizes, consider futures or FX pairs where tick values scale well to your risk objectives.
– If you trade penny/low-priced stocks, be aware of finer increments under $1 and potential liquidity concerns.
The bottom line
Tick size is a foundational market parameter that shapes liquidity, transaction costs, and the dollar impact of price moves. Effective traders measure tick values, incorporate them into risk and size calculations, and choose instruments whose tick structure fits their strategy. Regulatory experiments (like the SEC’s Tick Size Pilot) have shown changing tick increments can materially affect market quality, so keep informed about any rule changes that might affect the assets you trade.
Sources and further reading
– Investopedia — “Tick Size” (Joules Garcia):
– U.S. Securities and Exchange Commission — Tick Size Pilot Plan and Market Quality:
– FINRA / Exchanges — Assessment of the Plan to Implement a Tick Size Pilot Program: (or related FINRA/exchange reports)
– CME Group — E‑Mini S&P 500 Futures Contract Specs
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.