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Tick Size

Posted on October 19, 2025October 20, 2025 by user

Tick Size: Definition and Key Takeaways

Tick size is the minimum price increment by which the quoted price of a trading instrument can change. It varies by asset class and exchange and influences liquidity, bid-ask spreads, and trading costs.

Key takeaways:
* Tick size = smallest allowed price movement for an instrument.
* Most U.S. stocks trade in $0.01 increments; some markets and instruments use different conventions (pips, basis points, or instrument-specific ticks).
* Smaller tick sizes generally allow tighter spreads; larger ticks can increase market-maker margins.
* Traders should choose instruments and position sizes with the instrument’s tick size and tick value in mind.

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How Tick Size Is Measured

Historically, U.S. stocks were quoted in fractions (e.g., 1/16 = $0.0625). Modern markets use decimals:
* Stocks above $1.00: commonly $0.01 tick increments.
* Stocks below $1.00: exchanges may use smaller sub-penny increments (e.g., $0.0001).
* Futures: tick sizes are instrument-specific. Example: E-mini S&P 500 futures have a tick of 0.25 points; each 0.25 move equals a fixed dollar value (tick value).
* Forex: tick size is called a pip (commonly 0.0001 for many pairs); some brokers quote fractional pips to five decimals.

Rule changes (decimalization) standardized tick sizes in many markets, but exchanges may set different minimums for specific instruments.

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Tick Size Pilot Program (Summary and Results)

Purpose: The SEC tested larger tick sizes ($0.05) for certain small-cap stocks to evaluate effects on liquidity and market quality.

Design:
* Small-cap securities split into control and test groups.
* Two test groups had $0.05 quoting conventions with different trading restrictions.

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Findings:
* Test stocks generally saw wider spreads, increased volatility, and decreased price efficiency relative to the control group.
* Critics argued larger ticks predominantly benefited market makers by increasing margins.
* The broader market did not adopt a permanent nickel ($0.05) tick; most stocks remained at one-cent increments.


Pips and Forex Quotes

  • A pip is the standard tick size in forex, typically 0.0001 for most major pairs (1/100 of 1%, or one basis point in FX quoting).
  • Some brokers provide fractional pips (fifth decimal), where 0.00001 represents a tenth of a pip.
  • Pip value depends on the currency pair and trade size (lot size). Example: one standard lot (100,000 units) moved by 1 pip (0.0001) equals a $10 change in value for many EUR/USD trades, though exact value varies.

Examples

Stocks
* Tick = $0.01. If you buy 100 shares at $50.00 and price rises five ticks to $50.05:
* Profit = 100 × $0.05 = $5.00.

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Futures (E-mini S&P 500)
* Tick = 0.25 points; tick value = $12.50.
* Price moves five ticks (0.25 × 5 = 1.25 points): Profit = 5 × $12.50 = $62.50 per contract.

Forex (EUR/USD)
* Pip = 0.0001. Buy 100,000 EUR at 1.1200 and price rises five pips to 1.1205:
* Profit = 5 × 0.0001 × 100,000 = $50.00.

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Practical Considerations for Traders

  • Liquidity and spread: Smaller tick sizes can produce tighter spreads and lower explicit trading costs, but may reduce incentives for displayed liquidity provision in some cases.
  • Position sizing: Larger tick values mean each tick move has a bigger dollar impact—adjust position sizes and risk management accordingly.
  • Strategy fit: Day traders and scalpers often prefer instruments with small ticks and deep liquidity; swing traders may focus more on volatility and trend characteristics.
  • Market structure: Exchange rules and product specifications determine tick size—check contract specs before trading futures, options, or FX products.

Frequently Asked Questions

What is the difference between a tick and a pip?
* A pip is the standard tick in forex markets; a tick is the generic term for the smallest price increment in any market.

How does tick size affect trading costs?
* Larger tick sizes can widen spreads and increase explicit transaction costs; smaller ticks generally enable tighter spreads but may change market-making incentives.

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What is tick value?
* Tick value equals the dollar amount associated with one tick (tick size × contract multiplier or trade size). It determines profit/loss per tick for a given position.

Are tick sizes the same across markets?
* No. Tick sizes are set by exchanges and vary by asset class and specific instrument.

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Conclusion

Tick size is a fundamental market parameter that determines the smallest possible price change for an asset. It affects spreads, liquidity, and the monetary impact of price moves. Understand the tick size and tick value of instruments you trade to manage position sizing, costs, and risk effectively.

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