Exchange Tick Size Explained

A tick size is the minimum price increment permitted on a stock exchange—the smallest amount by which a bid or ask price can move. On most U.S. equity markets, a tick is one cent ($0.01) for stocks priced above $1, but tick sizes vary by asset class, price level, and regulatory regime. Larger tick sizes can widen bid-ask spreads, increase trading costs, and reduce market maker incentives to compete.

What tick size means in practice

Imagine a stock trading at exactly $100.00. The current bid (highest price buyers will pay) is $100.00; the ask (lowest price sellers will accept) is $100.01. That $0.01 gap is the bid-ask spread.

Now suppose a new buyer wants to lift the ask (buy at that offered price). They hit the $100.01 ask. Instantly, the spread might widen. A new seller comes in and offers shares at $100.02. Why not $100.011 or $100.009? Because the tick size of $0.01 doesn’t allow it. Prices must move in one-cent increments.

If the tick size were smaller—say, $0.001—sellers could undercut that offer by posting $100.001, and buyers could bid $100.009. Prices would compress tighter, potentially narrowing the spread. If the tick size were larger (for example, $0.10), sellers would have to jump from $100.00 to $100.10 at minimum, and spreads would widen dramatically.

How tick size varies by security type

U.S. stocks: The majority of equities trade with a one-cent tick on exchanges like the NYSE and NASDAQ. This was not always true. Before 2001, the minimum tick was one-sixteenth of a dollar ($0.0625), and tick-size reduction to pennies was a significant market-structure reform.

Penny stocks: Securities priced below $1 can trade in increments of $0.0001 (one ten-thousandth). This fractional-cent pricing was enabled in some markets to accommodate ultra-low-priced issues, though it also introduces opportunities for market manipulation due to the difficulty in tracking and comparing tiny price moves.

Options: Options on U.S. stock exchanges generally trade on a one-cent tick for options priced at $3.00 and above. Options priced below $3.00 may trade on a $0.05 tick. This pricing structure was set by the SEC and affects the competitiveness of option orders and the width of bid-ask spreads.

Fixed income: U.S. Treasury bonds traditionally traded on a tick size of 1/256 of par (one basis point for many instruments), but recent years have seen moves toward decimal pricing and finer increments in some instruments.

Commodities: Futures and commodity contracts have their own tick-size schedules set by their respective exchanges. Crude oil contracts, for instance, might tick in $0.01 increments, while some micro contracts may tick in $0.001 or finer.

The relationship between tick size and liquidity

A wide tick size creates a wider minimum spread and can reduce competition among market makers. If the minimum spread is $0.10, a market maker is less incentivized to tighten it further because prices can’t move in finer increments. The market maker earns the full $0.10 without pressure to offer better prices.

Conversely, a narrow tick size (pennies or fractions of cents) allows market makers to compete aggressively on price. To capture order flow, they post bids and asks that are separated by the smallest allowed increment. The result is tighter spreads, lower implicit trading costs, and higher liquidity for retail and institutional traders.

However, there is a trade-off. Extremely narrow ticks (like fractional cents) can make it uneconomical for market makers to operate on low-volume stocks. If a market maker can only earn $0.0001 per share on a low-volume stock, the incentive to provide continuous liquidity vanishes, and the market may become less liquid overall.

The SEC’s tick-size pilot program

In 2016, the SEC launched a multiyear pilot program to test whether wider tick sizes could improve liquidity and market maker participation in small-cap stocks. The pilot increased the tick size from $0.01 to $0.05 for a select group of stocks and measured the impact.

Results were mixed but generally suggested that wider ticks did not significantly boost participation or order-book depth on small-cap equities. Some traders benefited from slightly tighter spreads in specific instances, but overall costs did not improve. The pilot concluded in 2019 without implementing permanent changes to tick-size rules for the broad market. This reinforced the view that for most liquid equities, penny ticks are appropriate.

Why tick size matters to traders and investors

Costs: A one-penny wider spread may seem trivial on a single trade, but it compounds. A retail investor buying 100 shares at a one-cent wider offer than necessary loses $1 in this trade alone. Across thousands of trades, fractional-penny spreads accumulate into real money.

Order-book depth: Wider ticks can reduce the number of distinct price levels displayed in the order book. With a $0.10 tick, there might be only 5 price levels visible; with a $0.01 tick, there might be 20+. Deeper books are more informative and allow traders to size larger orders with less slippage.

Price discovery: Narrower ticks encourage more frequent price refinement. Price discovery—the process by which the true market value of a security emerges—is generally more efficient under penny ticks because competition forces prices to compress around fair value.

For market makers: Wider ticks create wider spreads and higher profits per trade, but may reduce trade volume if the wider spread discourages traders from participating. Narrower ticks compress profits per trade but increase volume and attract more order flow.

Global variations in tick size

Different markets and countries use different tick-size schedules:

• Europe: Many European exchanges use multi-tiered tick sizes, with finer increments for highly liquid stocks and larger ticks for penny stocks.
• Australia: The Australian Securities Exchange uses a $0.01 tick for most securities, similar to the U.S.
• Asia: Tick sizes vary widely. Some Asian exchanges use larger ticks to support market maker profitability in lower-volume markets.

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