Tick Size

The tick size is the smallest permissible price movement for a security. In US equities under Regulation NMS, the standard tick size is $0.01 for stocks priced above $1.00. For sub-$1.00 stocks, the tick size drops to $0.0001. Futures and options markets employ contract-specific tick sizes—for example, the E-mini S&P 500 futures contract has a tick size of 0.25 index points, equivalent to $12.50 per contract. This granularity directly constrains the minimum possible bid-ask spread, as the spread cannot be narrower than one tick.

Tick size acts as a binding floor for the quoted spread. When the equilibrium spread in a frictionless market would be narrower than one tick, the quoted spread is forced wider, creating a non-zero lower bound. This constraint is most binding for highly liquid, low-volatility securities where the natural spread would otherwise approach zero. Empirical studies of the SEC's Tick Size Pilot Program demonstrated that widening the tick from $0.01 to $0.05 for small-cap stocks increased quoted spreads by approximately 150%, directly raising the explicit cost of immediacy for liquidity demanders.

Tick size determines the minimum revenue per share for liquidity providers. A wider tick increases the economic incentive to post limit orders by guaranteeing a larger captured spread on each round-trip trade. This can improve depth at the inside quote and reduce adverse selection risk for market makers. However, the relationship is non-linear: excessively wide ticks can lead to queue-jumping behavior and price-time priority becoming the dominant mechanism, as traders cannot compete on price within the constrained grid. The optimal tick size balances the trade-off between spread width and depth provision.

Under SEC Rule 612 (the Sub-Penny Rule), market participants cannot display, rank, or accept quotations priced in increments smaller than $0.01 for NMS stocks priced above $1.00. However, midpoint executions in dark pools and price improvement mechanisms can occur at sub-penny increments. This creates a two-tier pricing environment: displayed liquidity is constrained to penny increments, while non-displayed liquidity can transact at finer granularity. The rule was designed to prevent quote flickering and protect the price-time priority of displayed limit orders from being undercut by economically trivial amounts.

Tick size directly affects the behavior of execution algorithms. In tight-tick environments, algorithms must manage queue position dynamics, as price competition is constrained and time priority dominates. Pegged orders and discretionary orders become critical tools for maintaining queue position while seeking price improvement. In wider-tick regimes, spread capture strategies become more viable, and algorithms can more effectively use limit order placement to earn the spread rather than crossing it. Pre-trade cost models must incorporate tick size as a key parameter when forecasting implementation shortfall.

The difference between the highest bid and lowest ask price. Tick size acts as a hard floor for the spread in non-subpenny markets.

• Quoted Spread: The raw difference in displayed prices
• Effective Spread: 2 × |trade price − midpoint|, capturing actual execution cost
• A larger tick size widens the minimum spread, increasing the rent captured by liquidity providers but potentially reducing displayed liquidity

The regulatory equivalent of tick size, set by exchanges or regulators like the SEC. The Tick Size Pilot Program (2016–2018) tested widening MPV for small-cap stocks.

• Regulation NMS Rule 612: Prohibits displaying quotes in sub-penny increments for stocks ≥ $1.00
• Sub-penny rule: Allows executions at sub-penny prices only if the midpoint falls between whole pennies
• MPV directly constrains the granularity of the National Best Bid and Offer (NBBO)

The cumulative volume of resting limit orders at each price level. Tick size determines the granularity of the order book.

• Price-time priority: Orders at the same tick compete on time; a finer tick allows more price points for queue jumping
• Tick-constrained queues: When tick size is binding, queues lengthen at the best price, increasing the value of time priority
• Depth imbalance: A coarse tick can concentrate liquidity at fewer levels, creating larger gaps between price points

Tick size defines the minimum revenue per round-trip for market makers. A wider tick increases the captured spread but may reduce trading volume.

• Make-take fees: Exchanges charge liquidity removers and rebate providers; the net spread must exceed fees for market making to be profitable
• Inverted venues: Some exchanges invert the fee structure, charging providers and rebating takers, altering the effective tick economics
• Tick size optimization balances liquidity provider profitability against investor execution costs

Different markets and asset classes operate under distinct tick size schedules, often tiered by price or liquidity.

• Equities (US): $0.01 for stocks ≥ $1.00; $0.0001 for stocks < $1.00
• Futures: Varies by contract (e.g., E-mini S&P 500 = 0.25 index points = $12.50)
• FX: Typically 0.1 pip (0.00001 for most majors), though institutional platforms use fractional pips
• Treasuries: 1/256th of a point for benchmark notes and bonds
• Dynamic tick regimes: Some venues adjust tick size based on liquidity metrics or volatility bands

Execution at price increments smaller than $0.01, permitted in certain dark pools and for stocks priced below $1.00. Sub-penny pricing allows price improvement but can fragment liquidity.

• Midpoint matching: Dark pools often execute at the midpoint, which may fall at sub-penny prices
• Step-outs: Brokers may internalize at sub-penny prices then report in whole pennies
• Criticism: Sub-penny quoting was banned under Reg NMS to prevent quote flickering and protect displayed depth