Understanding Stock Tick: The Smallest Price Movement in Trading

Whether you’re trading futures contracts, stocks, or other financial instruments, a stock tick represents the smallest possible price movement in an asset’s value.

In this blog, we talk about the definition of stock ticks, their significance, and how they influence market trends and trading strategies.

What Is a Tick in Stock Trading?

A stock tick is the smallest price increment that a security’s price can move up or down. It’s a fundamental unit of measurement for price movements in the stock market or futures market. Ticks ensure that price changes occur in defined steps rather than arbitrary amounts, so they help maintain an orderly market.

How Ticks Function in Trading

Ticks help manage market dynamics and enable precise pricing. For example:

• If a stock has a minimum tick size of £0.01, its price can increase or decrease by that amount per tick.
• For futures contracts, tick size depends on the contract specifications, such as the E-mini S&P 500 futures, where the tick size is often measured in index points.

How Does a Tick Work?

The functioning of ticks varies depending on the market and the financial instrument being traded.

Bid-Ask Spreads and Ticks

Ticks influence the bid-ask spreads. A bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask).

• In highly liquid markets, smaller tick sizes result in tighter bid-ask spreads. It will lead to potentially lower trading costs.
• In less liquid stocks, larger tick sizes may cause wider bid-ask spreads and it increases transaction costs for traders.

Market Liquidity and Efficiency

• Ticks enhance market liquidity: Ticks provide a framework for price changes and ensure that traders can execute trades without excessive price discrepancies.
• Ticks promote market efficiency: Ticks reflect real-time market conditions.

What Is Tick Size?

Tick size refers to the minimum price increment by which a security’s price can change. It is often set by regulatory bodies such as the Securities and Exchange Board or the exchange where the asset is listed.

How Tick Size Is Measured

Tick size is generally expressed in monetary terms, such as £0.01, or as a percentage of the asset’s current price. For example:

• For stocks, the tick size might be £0.01.
• In gold futures, the tick size could be $0.10.

Why Does Tick Size Matter?

The tick size has far-reaching implications for traders, investors, and the overall financial markets.

1. Affects Trading Costs

Smaller tick sizes result in narrower bid-ask spreads, which can reduce trading costs for market participants. Conversely, larger tick sizes may lead to higher transaction costs, especially in less liquid stocks.

2. Promotes Market Liquidity

A well-regulated tick size contributes to maintaining a liquid market. Traders can execute trades more efficiently.

3. Influences Market Noise

In highly volatile markets, smaller tick sizes can reduce market noise and help traders focus on big price movements rather than minor fluctuations.

4. Supports More Precise Pricing

Tick size standardizes the smallest price movements, so trades can be executed at fair market values.

Example of Tick

For future trading, consider a scenario involving the E-mini S&P 500 futures contract:

• Tick Size: 0.25 index points.
• Tick Value: $12.50 per tick.
• If the futures contract moves from 4000.00 to 4000.25, the price change is one tick, equivalent to $12.50 per contract.

For stocks, if a security’s price is £50.00 and the tick size is £0.01, then a movement to £50.01 is one tick.

Factors Affecting Tick Sizes

The minimum tick size is not universal and varies based on the asset, market, and regulatory guidelines. Here are factors that affect tick sizes:

1. Market Liquidity: Highly liquid stocks often have smaller tick sizes.
2. Market Volatility: Highly volatile assets may have larger tick sizes.
3. Asset Class: Different financial instruments – mutual funds, stocks, and futures contracts, etc – have different tick size requirements.

How Tick Size Impacts Trading Strategies

Understanding tick sizes help you develop an effective trading strategy:

1. Scalping

Scalpers target smallest price movements. They leverage small tick sizes in liquid markets to make rapid gains.

2. Swing Trading

Swing traders analyze tick value and tick size increments to identify significant price patterns over several days.

3. Day Trading

Day traders rely on tick sizes to anticipate market trends and execute short-term trades with minimum price fluctuations.

FAQs

Is Trading Tick Good?

If you’re actively trading day trading ticks may prove surprisingly profitable. The very first benefit of tick-for-tick trading is its ability to filter out irrelevant price movements.

What Is the Difference Between Tick Size and Tick Value?

• Tick size: The minimum price change.
• Tick value: The monetary value of one tick movement, which varies depending on the asset and its specifications.

What Is the Minimum Tick Size?

The minimum tick size is the smallest increment by which a price can change. It varies depending on the asset type and the market in which it is traded.

Why Do Tick Sizes Vary Across Markets?

Tick sizes are influenced by factors like market liquidity, asset class, and market volatility, ensuring that price changes reflect market dynamics appropriately.