What is Tick Size?

Investors should be aware of a variety of phrases pertaining to trading in the financial markets. It is possible to trade without fully understanding the assets you are buying or selling. Still, it is not a wise decision to be uninformed about the basic terminology used in the markets. Tick size is one of the key ideas that you should learn, yet it’s one that’s frequently disregarded.

Making wiser investing decisions can be aided by learning the definition of tick size and seeing some tick size instances. Without further ado, let’s examine what is tick in trading actually entails.

Tick Size Meaning

The minimal price difference between an asset’s bid and offer prices on an exchange platform is known as the tick size. It is the smallest price differential between successive bids and offer prices that has always existed. Stated differently, it is the smallest increment at which prices can fluctuate. For instance, the next five best bid prices for a stock with a tick size of Rs 0.05 and a last traded price (LTP) of Rs 100 are Rs 99.95, Rs 99.90, Rs 99.85, Rs 99.80, and Rs 99.75. Since the bid price in this case does not exceed the tick size of Rs 0.05, it cannot be, for example, Rs 99.87.

Origin of Tick Size

When stocks were exchanged on the NYSE floor prior to the invention of electronic trading, traders would purchase and sell equities in person. Stock prices used to vary by 1/8th or 1/16th of a dollar back then. This indicates that they changed in value per share by $0.125 or $0.0625, respectively. But now, even a few pennies can make a big difference in stock values.

However, in the past, investors would attempt to profit on even the smallest fluctuations in stock prices. By determining the minimum movement that a stock could experience, traders could attempt to trade in between price fluctuations. Tick size is a very old idea, and traders on stock exchanges and other exchanges have been trying to profit from it ever since the price of the assets fluctuated based on the tick size.

Importance of Tick Size

Let’s examine how minimum price investments in trading gain importance.

Investors should understand the instrument’s tick size prior to investing. Tick moves indicate whether or not an investor should purchase or, more crucially, sell an asset. Investing is not just about putting money into an asset; it’s also about tracking its movements in the market.

This is so because variations in price are intimately correlated with tick movements. For example, the impact of a 5-cent investment displaying negative movement will differ from that of a 5-dollar investment ticking up or down. As a result, price swings are higher in proportion to size. As a result, investors need to exercise caution if the price drops because they can lose money.

An investor can forecast the direction and movement of the asset if they comprehend the tick motion. As everyone knows, the foundation of investing is forecasting.

How Does Tick Size Work?

You will usually notice a quoted price for those securities, down to the last penny, when investigating stocks. For instance, the market price of stock XYZ could be $25.73. The price that is quoted is typically the same as the amount that was paid in the most recent transaction involving that security.

The prices that investors might offer while attempting to purchase or sell shares are influenced by tick size. It basically establishes the maximum amount that a share’s price can fluctuate with each transaction.

Many investors typically have active purchase and sell orders for XYZ behind the scenes. There can be a large number of sellers seeking to get more than $25.73 and a large number of buyers looking to pay less. You should observe a lot of buy and sell orders at $25.72 and $25.74 if XYZ is a highly liquid stock.

The smallest difference between the buy and sell prices that can be shown is described by the tick size. Because investors can detect variances in purchase and sell prices as tiny as a penny, the tick size in the case above is one cent.

In the case above, the market could only show price differences in 5-cent increments if the tick size for XYZ was 5 cents. This indicates that it would display purchase orders at $25.70 and sell orders at $25.75.

Securities can be priced more precisely and granularly with smaller tick sizes. Investors could only purchase shares at $50, $51, and so on if, for instance, the tick size for equities was $1. Even though that was a more realistic price for the security they wanted to purchase, they were unable to offer it at $50.27.

What is the Difference Between Tick Size and Tick Value?

Aspect	Tick Size	Tick Value
Definition	The minimum price movement allowed	The monetary value of one tick movement
Determination	Set by the exchange or regulatory body	Calculated based on tick size and contract size
Example	Tick size of 0.01 for a stock	Contract size of 100 shares, tick size of $0.01 results in tick value of $1
Importance	Indicates the granularity of price movement	Determines the financial impact of price changes
Relationship	Directly related to price increments	Indirectly related to price increments
Impact on trading	Larger tick size may limit trading flexibility	Higher tick value can influence trading strategies
Flexibility	Fixed for a specific security or market	Variable based on contract size and tick size
Regulation	Subject to regulatory oversight	Governed by market rules and conventions
Application	Relevant for all traded instruments	Particularly significant in futures and options markets
Market impact	Can affect liquidity and price discovery	Influences transaction costs and profit potential

How Is Tick Size Measured?

The smallest price fluctuation securities can encounter is referred to as its tick size. As it affects many facets of market activity and establishes the accuracy of price fluctuations, it is a crucial idea in trading. So, how is tick size measured precisely?

Price increments or percentages are commonly used to express tick size. A security with a tick size of $0.01, for instance, can go up or down by one cent at a time. A tick size of 1%, expressed in percentage terms, indicates that the price of the securities may fluctuate by 1% steps.

The exchange or market where the security is traded determines how big of a tick a security is. The tick sizes for various securities are governed by the laws and regulations specific to each exchange.

Exchanges take into account variables, including volatility, liquidity, and general market circumstances, when determining tick sizes. To enable more accurate pricing, more liquid stocks might have smaller tick sizes, whereas less liquid equities might have bigger tick sizes.

Exchanges may run pilot programs to test various tick sizes for specific stocks or ETFs over a predetermined time frame. These tools aid in determining whether variations in tick sizes have an impact on bid-ask spreads and trading volumes.

A number of exchange-specific criteria must be taken into account when measuring tick size to make sure it complies with market dynamics and the standards needed for efficient and fair trading. Traders can decide on their trading tactics based on this important feature of market structure by knowing how tick size is measured.

Tick Size Example

For a better understanding of this concept’s use in real life, consider the following tick-size example. Assume for the moment that a stock’s tick size is Rs. 0.10. Let’s assume that the last trade was at Rs. 100. Thus, the optimal bid prices for the stock may be, among other values, Rs. 99.90, Rs. 99.80, Rs. 99.70, and so forth. Since the bid price of Rs. 99.84 does not match the tick size for that stock, it would be illogical and contradictory.

In a similar vein, the tick size will likewise affect the offer prices. The figures in question are INR 100.10, INR 100.20, INR 100.30, and so forth. The price that appears at the following point when you move by the tick size will be taken into consideration if there are no bids at that specific level. For example, the next bid price of Rs. 99.80 will become the best bid price if there are no offers at Rs. 99.90. This also applies to the price of the deal.

The Bottom Line

Tick trading provides traders with a number of benefits, including reduced spreads, quicker execution, and more liquidity. It is also beneficial since it gives smaller investors better possibilities and ensures that prices remain close to their genuine worth. To gain from these advantages, if you’re going to trade stocks in India, think about utilising tick orders

Frequently Asked Questions

1. What is tick size in trading?

The smallest potential increase or decrease in price movement is known as the tick size. For instance, a stock with a Rs. 0.5 tick size can only move in increments or decreases of Rs. 0.5; it cannot move any smaller than that.

2. How do you calculate tick size?

Generally, the formula is the minimal price increment multiplied by an exchange-determined component. For instance, your tick size would be $1 if the exchange’s factor is 100 and the minimum price increment is $0.01.

3. Does tick size matter?

Yes. Even though tick movements, sizes, and values are rare, a seasoned investor would recognize this characteristic because it is crucial for forecasting and asset movement analysis.

4. Why do exchanges set minimum tick sizes?

Exchanges impose minimum tick sizes in an effort to maintain orderly trading and limit excessive price volatility. Exchanges seek to preserve stability and fairness in trading activity by placing restrictions on price fluctuations.

5. Can stocks trade between tick sizes?

Indeed, stock prices are tradable within the specified tick sizes. We call this “trading inside the spread.” For instance, if a stock’s tick size is $0.01, it can be traded in multiples of one cent or increments of one cent.

6. What is the tick size in MCX?

The smallest price fluctuation that can affect a futures contract’s value is referred to as the tick size in futures trading. It stands for the smallest price quote increase in the futures market. For instance, the price may move in increments of 0.25 if the tick size is 0.25.