What is Tick Size? Does it matter for your Trading?

Trading concepts

What is Tick Size?

Are you wondering about what tick size is? Well, you will get answers to your questions over here. Tick size is actually used for referring to the minimum price movement of a trading instrument in the market. There are different price movements for different trading instruments.

The tick size represents the minimum amount where they can move up or down. The trade size increments in US markets are represented by the sign of cents or dollars. Stocks are traded in one-cent tick increments. While if you trade currencies, the tick sizes are in the pips. The rates of currencies are on basis points (bps).

Brief Explanation of Tick Size

The minimum price change between any bids is tick size. It also includes the offer of prices of any asset that trades on any exchange platform. It is actually the minimum difference between the offer prices and consecutive bids all the time.

You may also say that it is a minimum increment in which the prices change. Let’s take an example. If any stock has a tick size of $0.05 and its last traded price (LTP) was $100. Then the best prices of stock will be $99.90, $99.95, $99.80, $99.85, and $99.75. Here, the price cannot be $99.87 as it will not meet the tick size that is $0.05.

Why Tick Size Matters?

If you are new to trading, you must know the importance of tick size. If you do not know about the tick value of the future, then you will take relatively too small or too big values. Do you know that each contract moves in a certain different way?

The increase in tick sizes in small-cap markets is also very beneficial. Even there was a pilot test conducted in this regard. Tick sizes matter a lot when you a trading and for future contracts.

Common Futures Contracts and the Tick Sizes

There are different tick sizes used for different times. Below are the tick values and tick size for the most common trades:

  • The tick size of Euro FX (6E) is 0.00005 U.S. dollars per euro. The price will increase to $6.25 as the contract is 125,000 euros.
  • The future contracts of -mini S&P 500 (ES) have a tick value of $0.25. The contract unit is $50 times, and the dollar amount moves by $12.50.
  • Similarly, with an increment of $0.01 per barrel, Light sweet crude oils’ (CL) future contract moves. Moreover, the dollar value moves with $10.6 as the contract is for 1,000 barrels.
  • The tick size of Gold (GC) is $0.10 per troy ounce. The contract price moves with increments of $10.7 as the contract is for 100 troy ounces.
  • With a move in $0.001 increments per million British thermal units (MMBtu), the Natural gas futures (NG) has a contract for 10,000 MMBtu. Hence the price moves $10 at a time.

How can we Find Other Tick Sizes and Values?

If you want to determine the value and tick size of the futures contract, then there are simple steps. For example, if you want to check for CME Group exchange. Then you will have to go to CME Group’s website. And move the cursor over markets.

After that, select the featured category or the product. Then there is the Contract Specs tab, and you will know the tick size and also the dollar value.

Similarly, if you want to check detail on any other exchange, you will do the same thing. There were times when tick sizes were quotes in the form of fractions. But now, they are based on decimals and also expressed in the form of cents.

Quick Guide to Measure Tick Size

As we told you earlier, tick sizes are based on the form of decimals nowadays. In the early 2000s, the tick sizes were express in the form of fractions of dollars. The fraction was one-sixteenth for most of the stocks. So, here the tick sizes were like $0.0625.

But there were some stocks that had one eighth. And even some had one thirty-second of tick sizes. This fraction tick size method originates when there was the early New York Stock Exchange (NYSE).

NYSE first modeled its measurements on the Spanish trading system that was centuries old. This system uses the base of eights.

Sub Penny Rule

Sub Penny Rule or Rule 612 was introduced in the year 2005. It was by the Securities and Exchange Commission. In this, the minimum tick size for stocks is over $1.00 to be $0.01.

Whereas the stocks that are under $1.00 can easily quote in increments of $0.0001. This whole process is decimalization.

Now, U.S. Securities and Exchange Commission (SEC) requires all the exchanges in the US to use hundredths effectively. And the reason is why the tick size is $0.01, or one cent for most of the stocks. It has experimented with some less liquid stocks for the larger tick sizes.

There are many other futures markets that have a tick size that is very specific to the instruments. It uses a $1 minimum tick size that is also having name “points”. Let’s take an example of the S&P 500 E-mini’s highly traded futures contract over here.

The tick size is of 0.25, or you may say $12.50. It means that the current price is of $2,553 according to the March 2021 contract. Suppose someone wants to offer more than that. Then they must bid at a minimum of $2,565.50. The other indexes can also move by $5 or %10.

Results of the Tick Size Pilot

It was a test where some traders and also some of the retail brokers criticized the study of tick sizes. They argued that a move to $0.05 of tick sizes gave benefit to the market makers. It potentially raised the trading margins at the individual investors’ expense.

The stocks that were in test groups, experience a great increase in spread and also the volatility. They also have faced a decrease in price efficiency that was relative to stocks in any control group. It was all on the white paper plan that was released in January 2018. And its name was“Tick Size Pilot Plan and Market Quality.”

Moreover, SEC got a publicly available joint assessment in January 2018 from FINRA and other exchanges that were shown publically. In this assessment, the impact of the Tick Size Pilot was shown.

What is Pip and Foreign Exchange?

The pips are equivalent to 1/100, 0.01%, or one basis point. The foreign exchange (forex) market uses a four decimal quotes convention. It uses the four-decimal quoting convention that utilizes pip for tick sizes.

Can Tick Sizes Be Fixed?

Most of you have questions about the fixation of tick sizes. The tick sizes can easily fix, varying upon the prices. The heavily traded stocks are having small tick sizes. They can fix by decimal assembling.

Conclusion

Tick size is essential to determine if anyone wants to do trading. They vary from market to market and also from one area to another area. There are specific values that each market has upon which trading takes place.

Stay tuned with us for further details.

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