Tick Size

Tick Size (also known as the 'minimum price increment') is the smallest possible price movement a security can make on an exchange. Think of it as the financial market's equivalent of a penny or a cent. If a stock is priced at $50.00 and has a tick size of $0.01, the very next price it can trade at is either $50.01 or $49.99—and nothing in between. You won't see it trade at $50.005. This standardized increment applies to various financial instruments, including stocks, options, and futures. Exchanges set these rules to create a more orderly and transparent marketplace, preventing a chaotic free-for-all of bids and offers at infinitely small fractions. For investors, the tick size directly influences the bid-ask spread, which is the gap between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. A smaller tick size can lead to a tighter spread, which is good news because it can reduce your trading costs.

The concept is simple, but its application varies. The tick size for a security depends on the asset type, its price, and the exchange it trades on.

• For U.S. Stocks: For most stocks trading above $1.00 on major exchanges like the New York Stock Exchange (NYSE) or Nasdaq, the standard tick size is $0.01 (one cent). This is a result of a process called “decimalization” that occurred in the early 2000s, moving away from the old system of pricing in fractions like 1/8th or 1/16th of a dollar.
• For Other Assets: Other markets have their own rules. Futures contracts, for example, have tick sizes that are unique to each contract. A tick in a crude oil contract might be $0.01, representing a $10 change in the contract's value, while a tick in an S&P 500 E-mini futures contract is 0.25 index points, representing a $12.50 change.

The key takeaway is that tick size creates a standardized ladder of prices. Every buy or sell order must land on one of these “rungs,” ensuring that price movements are predictable and uniform.

While it might seem like a tiny detail, tick size has a surprisingly large impact on market dynamics. It's a key ingredient in the recipe for market liquidity. Regulators and exchanges are constantly trying to find the “Goldilocks” tick size—not too big, not too small.

• A Smaller Tick Size: Can lead to narrower bid-ask spreads. This is generally great for investors as it lowers the cost of entry and exit. However, it can also reduce the incentive for market makers to provide liquidity, especially for less-traded small-company stocks, as their potential profit on each trade is smaller.
• A Larger Tick Size: Can create a wider bid-ask spread, making it more profitable for market makers to trade a stock, which can theoretically encourage them to provide more liquidity. However, this wider spread acts as a higher transaction cost for investors.

In the U.S., regulators even ran a “Tick Size Pilot Program” to experiment with a larger tick size ($0.05) for certain small-cap stocks to see if it would improve their trading liquidity. The results were mixed, proving that there's no one-size-fits-all solution.

So, should a value investor lose sleep over tick sizes? Absolutely not. Your focus should always be on the big picture: finding wonderful businesses and buying them at a significant discount to their intrinsic value. Whether you buy a stock at $20.01 or $20.02 because of the tick size is largely irrelevant if you believe its true worth is $40.00. Arguing over ticks is like meticulously polishing the chrome on a car while ignoring that the engine is missing. However, understanding tick size is part of being a well-informed investor. It helps you appreciate the subtle, “frictional” costs of investing. The bid-ask spread, influenced by the tick size, is a real cost that eats into your returns over time. Being aware of it reinforces the value investor's creed of being a patient, long-term owner, not a hyperactive trader. Frequent trading means you cross the bid-ask spread repeatedly, letting those little ticks nibble away at your capital. In short, know what a tick size is, appreciate its effect on your trading costs, and then get back to the real work: analyzing businesses. Don't let the noise of the market's ticks drown out the signal of a company's true value.