Tick size

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In financial markets, the tick size is the smallest price increment in which the prices are quoted. The meaning of the term varies depending on whether stocks, bonds, or futures are being quoted.

Contents

Bonds

U.S. mortgage bonds and certain corporate bonds are quoted in increments of one thirty-second (1/32) of one percent. [1] That means that prices will be quoted as, for instance, 99-30/32 - "99 and 30 ticks", meaning 99 and 30/32 percent of the face value. Prices can also be quoted with a "plus", meaning one sixty-fourth (1/64) of one percent or half a tick. [2] That means that a price is quoted as, for instance, 99-30+, meaning 99 and 61/64 percent (or 30.5/32 percent) of the face value. As an example, "par the buck plus" means 100% plus 1/64 of 1% or 100.015625% of face value.

Most European and Asian bond and futures prices are quoted in decimals so the "tick" size is 1/100 of 1%. [3]

Stocks and futures

Tick size is the smallest increment (tick) by which the price of stocks, [4] futures contracts [5] or other exchange-traded instrument can move.

The purpose of having discrete price levels is to balance price priority with time priority. If the tick is too small then too much of a preference is given to price priority meaning that market makers and the general public will have less of an incentive to post their orders well in advance since people can jump ahead of them by increasing their price by a small, virtually inconsequential, fraction. If the tick is too big then the opposite happens and time priority is given far too much of an advantage. The size of a tick is picked to basically balance those two priorities.

Tick sizes can be fixed (e.g., USD 0.0001) or vary according to the current price (common in European markets) with larger increments at higher prices. Heavily-traded stocks are given smaller tick sizes. An instrument price is always a rational number and the tick sizes determine the numbers that are permissible for a given instrument and exchange.

In Europe, Mifid has resulted in a variety of multilateral trading facilities (MTF) with distinct tick size regimes for the same stocks. These differences mean that order routing systems must be aware of every MTF's tick size regime and adjust outgoing orders accordingly. There is now an industry effort underway to harmonise tick sizes. [6] As of 2019, the article 49 of the new MiFID II directive requires trading venues to adopt minimum tick sizes in relation to equity and certain equity-like instruments.

Why are price increments limited to ticks?

In theory, the price for a stock could be any fraction of a dollar (or euro, yen, ...). American stocks could be traded on 1/100 of a cent: the usual trade is 100 shares and a penny in the trade price would be 1/100 of a cent when calculated per share. But that's not the case: per share, it is still traded in cents. The reason is that if the difference between two prices was very small, it would be easier to do "penny jumping", which is a small scale version of front running.

See also

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Contango

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Bond market

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Futures exchanges establish a minimum amount that the price of a commodity can fluctuate upward or downward. This minimum fluctuation is known as a tick or commodity tick. Hence, a tick is any fluctuation in the price of a security.

In finance, specifically in foreign exchange markets, a percentage in point or price interest point (pip) is a unit of change in an exchange rate of a currency pair.

Stock

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Small Cap Liquidity Reform Act of 2013

The Small Cap Liquidity Reform Act of 2013 is a bill that is intended to increase the liquidity on the stock market of stocks belonging to emerging growth companies. It would allow small companies to choose a tick size of $0.05 or $0.10 instead of the standard $0.01. To participate, companies would need to have stock prices of over $1.00 and revenues of less than $750 million.

References

  1. Glossary of Fixed Income Market Terminology. Freddie Mac.
  2. Fixed Income Securities and Derivatives Handbook: Analysis and Valuation. Moorad Choudhry. Wiley 2010. p. 376
  3. Interest Rate Derivatives: Fixed Income Trading Strategies. Eurex Frankfurt AG. p.7
  4. "Understanding The Ticker Tape", Investopedia
  5. Futures Contract Specifications (Tick Values) , retrieved 26 September 2009
  6. "BATS Europe Newsletter - 10th June 2009" (PDF). BATS Europe . Retrieved 26 June 2009.