Tick Size Explained: What It Means in Trading, Rules, and Real-World Examples

Gordon Scott brings over 20 years of experience as an investor and technical analyst. He holds the Chartered Market Technician (CMT) designation.

Understanding Tick Size

Tick size is the smallest possible price increment by which a trading instrument can move in the market.

In the U.S., tick sizes are usually expressed in decimal form. For stocks, this is commonly $0.01 per tick, while currencies use pips and fixed-income instruments use basis points (bps) as their tick units. Traders and analysts refer to price changes using these tick increments.

Key Points to Remember

• Tick size defines the minimum price increment change for a trading asset.
• Historically, tick sizes were quoted in fractions (like 1/16th of a dollar), but now decimals dominate.
• Most stocks have a tick size of one cent, though sub-penny increments may sometimes occur.
• Currency markets use pips, and bond markets use basis points as their tick sizes.

How Tick Size Is Determined

Before decimalization in the early 2000s, U.S. stock tick sizes were fractional, commonly 1/16th of a dollar ($0.0625). This system originated from old trading conventions dating back centuries. In 2005, the SEC implemented Rule 612, mandating decimal pricing with minimum tick sizes of $0.01 for stocks priced above $1 and $0.0001 for those below $1. This standardization aimed to simplify trading and improve market transparency.

Futures contracts have their own tick sizes, often called "points." For example, S&P 500 futures have a tick size of 0.25 points, meaning price changes must occur in increments of 0.25. If the current price is $4,553.00, a bid must be at least $4,553.25 to be valid.

The SEC Tick Size Pilot Program

In 2016, the SEC launched a two-year pilot to explore the effects of increasing tick sizes to $0.05 for certain small-cap stocks. The study divided stocks into control and test groups with varied tick size rules. Results showed increased spreads and volatility in the test groups, leading to criticism that the change mainly benefited market makers rather than retail investors.

Ultimately, exchanges decided against adopting larger tick sizes, maintaining the $0.01 standard for most stocks.

Forex Market and Pips

In forex trading, the smallest price increment is known as a pip, typically 0.0001 for currency pairs like EUR/USD. Some brokers offer fractional pips, extending precision to five decimal places (e.g., 1.12573). The value of a pip depends on the currency pair and trade size.

Practical Tick Size Examples

Stocks: If Trader A buys 100 shares of stock ABC at $50.00 with a $0.01 tick size, and the price rises five ticks to $50.05, the gain is 100 × $0.05 = $5.00.

Futures: Trader B buys one E-mini S&P 500 futures contract at $4,700.00. With a tick size of 0.25 points and a $50 multiplier per point, each tick equals $12.50. Five ticks up equate to 5 × $12.50 = $62.50 profit.

Forex: Trader C purchases 100,000 EUR/USD at 1.1200. With a pip size of 0.0001, a five-pip increase to 1.1205 yields 5 × 0.0001 × 100,000 = $50 profit.

Helpful Tip

Remember, tick size is the smallest price movement increment, while tick value is the monetary impact of that move on your position. For example, in S&P 500 E-mini futures, a 0.25 tick size translates to $12.50 per tick.

Why Tick Size Matters for Traders

Active traders must consider tick size as it affects liquidity, risk, and reward. Larger tick sizes mean bigger profit or loss per price increment, often leading traders to adjust position sizes accordingly.

Can Trades Occur Between Tick Sizes?

Yes. Although official tick sizes are standardized, some trades execute at sub-penny increments, especially when matching hidden orders or through retail price improvement programs. Dark pools and internalization by brokers also allow sub-penny pricing, but these trades are not publicly displayed.

How to Find the Tick Size of an Instrument

Tick sizes are set by exchanges based on the instrument type and market rules. To determine the tick size for a specific asset, consult the product specifications published by the relevant exchange.

Why Exchanges Set Minimum Tick Sizes

Minimum tick sizes help maintain orderly markets by preventing excessive price fragmentation. Properly sized ticks balance liquidity and price discovery; too large a tick widens spreads and raises trading costs, while too small a tick can clutter order books and hinder efficient pricing.

Summary

Tick size is the smallest allowed price increment for a security, set by exchanges and varying across asset classes. The move from fractional to decimal tick sizes in U.S. markets has improved market clarity and reduced spreads. Though sub-penny trading occurs, the standard tick size for most stocks remains $0.01. Understanding tick size and tick value is essential for managing trading strategies and evaluating potential profits or losses.

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