Tick Size
Tick size is the minimum price increment by which a financial instrument's price can move in a regulated market, defining the smallest possible difference between a bid and offer price or between consecutive trade prices. It is set by the exchange or regulatory body and varies by instrument type, price level, and market, directly influencing bid-ask spreads, market liquidity, and trading costs.
Key takeaways
- For US equities, the standard tick size is $0.01 per share (one cent), though the SEC's Tick Size Pilot (2016–2018) tested wider tick sizes for small-cap stocks to assess impacts on liquidity and market making.
- Futures contracts have standardized tick sizes defined in their contract specifications—for example, the E-mini S&P 500 futures tick is 0.25 index points ($12.50 per contract), and the WTI crude oil futures tick is $0.01 per barrel ($10 per contract).
- Tick size directly influences the minimum bid-ask spread: a market maker's minimum profit per round trip equals one tick for a quoted market, so wider ticks generally support greater profitability for market makers and encourage more liquidity provision.
- The 2001 decimalization of US equity markets (transition from fractional pricing in 1/16ths to decimal pricing in $0.01 increments) dramatically narrowed bid-ask spreads, benefiting retail investors but reducing market maker profitability and potentially reducing liquidity for small-cap stocks.
- In high-frequency trading, sub-tick pricing (accessing prices between official tick increments through internalization or off-exchange venues) is a source of price improvement for retail orders and a competitive tool for electronic market makers.
Explanation
Tick size is a fundamental parameter of market design with far-reaching implications for market quality, trading costs, and the economics of market making. The choice of tick size involves a classic regulatory tradeoff: smaller ticks reduce transaction costs for investors by allowing prices to reflect true market clearing levels with greater precision, while larger ticks ensure that market makers can earn a minimum spread to cover their costs and risk, incentivizing liquidity provision.
Historically, US equity markets traded in fractions of dollars—initially in 1/8ths ($0.125) and later in 1/16ths ($0.0625)—which set the effective minimum bid-ask spread at 12.5 or 6.25 cents per share. This fractional system provided market makers with implicit subsidies: even for highly liquid stocks like IBM or General Electric, the minimum spread was 6.25 cents regardless of the true cost of market making. The SEC's Regulation NMS and the transition to decimal pricing in 2001 compressed minimum spreads to 1 cent, dramatically reducing trading costs for retail and institutional investors—the bid-ask spread on the most liquid stocks fell from 10–15 cents to 1–2 cents post-decimalization.
The unintended consequence of decimalization was the near-collapse of traditional market making economics for small-capitalization stocks. With a 1-cent minimum spread and relatively low share prices (a $5 stock with a 1-cent spread implies a bid-ask cost of 0.2% per round trip—20 basis points), the economics of maintaining continuous, two-sided markets in small stocks became marginal. Liquidity deteriorated for smaller companies, wider realized spreads (despite the narrow tick) manifested through larger market impact costs, and the number of market makers willing to maintain positions in small stocks declined. The SEC's Tick Size Pilot Program (2016–2018) tested 5-cent tick sizes for 1,200 small-cap stocks, finding that wider ticks did increase market maker participation and quote depth but also increased trading costs for investors.
Futures tick sizes are set by exchange contract specifications and are designed to balance market efficiency with practical trading mechanics. The E-mini S&P 500 futures contract (CME Group) has a tick of 0.25 index points, corresponding to $12.50 per contract (0.25 × $50 multiplier). This tick was selected to provide sufficient resolution for price discovery while limiting quote stuffing from excessive order generation at sub-cent increments. Energy futures—crude oil, natural gas—have ticks of $0.01 per unit, calibrated to the scale of price moves in those commodities. Interest rate futures typically have fractional ticks: the 10-year Treasury note futures tick is 1/64 of 1 point (= $15.625 per contract), reflecting the precision needed in the bond market.
Algorithmic trading and high-frequency trading have fundamentally changed the practical significance of tick size. Electronic market makers can now position orders at exactly the minimum tick increment, react to queue priority changes in microseconds, and manage hundreds of positions at precise tick-sized increments simultaneously. The concept of queue position at the inside bid or offer—which order gets filled first when multiple orders are at the same price—has become a critical dimension of competitive advantage in equity market making, driving investment in co-location, low-latency data feeds, and order routing optimization.
Formula
Tick Value = Tick Size × Contract Multiplier
Example
The E-mini S&P 500 futures contract (ES) has a tick size of 0.25 index points, and each point is worth $50, making each tick worth $12.50. If the current ES bid-ask spread is 4,500.00/4,500.25, the bid-ask is exactly 1 tick wide—the minimum possible. A trader who buys at the offer (4,500.25) and sells at the bid (4,500.00) has paid a round-trip cost of 1 tick or $12.50 per contract in bid-ask spread (ignoring commissions). For a trader executing 1,000 contracts per day (common for an institutional algorithmic trader), this represents $12,500 per round trip in spread costs alone. Improving to a strategy that captures half the spread by posting limit orders at both the bid and offer would save $6,250 per 1,000 contracts traded, representing significant economic value at scale.
Related terms
Algorithmic Trading Basis Bid Ask Spread Bond Cap Clearing Co Location Cover Equity Exchange Futures Contract High Frequency Trading