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.

Stock financial instrument

The stock of a corporation is all of the shares into which ownership of the corporation is divided. In American English, the shares are commonly known as "stocks." A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

Futures contract standardized legal agreement to buy or sell something (usually a commodity or financial instrument) at a predetermined price (“forward price”) at a specified time (“delivery date”) in the future

In finance, a futures contract is a standardized forward contract, a legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price the parties agree to buy and sell the asset for is known as the forward price. The specified time in the future—which is when delivery and payment occur—is known as the delivery date. Because it is a function of an underlying asset, a futures contract is a derivative product.

Financial instrument monetary contract between parties

Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond).

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 0.01) 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.

Rational number number that can be expressed as the quotient of two integers

In mathematics, a rational number is any number that can be expressed as the quotient or fraction p/q of two integers, a numerator p and a non-zero denominator q. Since q may be equal to 1, every integer is a rational number. The set of all rational numbers, often referred to as "the rationals", the field of rationals or the field of rational numbers is usually denoted by a boldface Q ; it was thus denoted in 1895 by Giuseppe Peano after quoziente, Italian for "quotient".

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.

A multilateral trading facility (MTF) is a European regulatory term for a self-regulated financial trading venue. These are alternatives to the traditional stock exchanges where a market is made in securities, typically using electronic systems. The concept was introduced within the Markets in Financial Instruments Directive (MiFID), a European Directive designed to harmonise retail investors protection and allow investment firms to provide services throughout the EU.

An order is an instruction to buy or sell on a trading venue such as a stock market, bond market, commodity market, financial derivative market or cryptocurrency exchange. These instructions can be simple or complicated, and can be sent to either a broker or directly to a trading venue via direct market access. There are some standard instructions for such orders.

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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Fixed income

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A per ten thousand sign or basis point is one hundredth of a percent or equivalently one ten thousandth. The related concept of a permyriad is literally one part per ten thousand. Figures are commonly quoted in basis points in finance, especially in fixed income markets.

Market depth

In finance, market depth is a real-time list displaying the quantity to be sold versus unit price. The list is organized by price level and is reflective of real-time market activity. Mathematically, it is the size of an order needed to move the market price by a given amount. If the market is deep, a large order is needed to change the price.

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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.

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In finance, a dividend future is an exchange-traded derivative contract that allows investors to take positions on future dividend payments. Dividend futures can be on a single company, a basket of companies, or on an Equity index. They settle on the amount of dividend paid by the company, the basket of companies, or the index during the period of the contract.

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.