Quick definition Tick size is the smallest price increment at which a security can be quoted or traded. It is the minimum distance between two prices on the order book. What it is The tick size is set by regulation and varies by market and security. In US equities, the tick is 0.01 dollars. In commodities, the tick might be 0.01 or 0.001 dollars depending on the contract. In crypto, prices can move by arbitrarily small amounts (no minimum). The tick size constrains the bid-ask spread. If the tick is 0.01 dollars, the spread cannot be narrower than 0.01 dollars. A market cannot have a bid of 100.00 and an ask of 100.001. Why it matters Tick size affects the cost of trading. Smaller ticks allow tighter spreads and lower transaction costs. Larger ticks force wider spreads. Tick size also affects market structure. When the SEC moved to decimals (0.01 dollar ticks) from fractions (1/16 dollar ticks) in the early 2000s, spreads tightened significantly, reducing transaction costs for retail traders. Tick constrained versus sub-penny pricing Most exchanges are constrained to tick size. A bid of 100.004 or 100.005 is not allowed. However, some venues allow sub-penny orders (prices between ticks), creating a complex pricing landscape where two traders can execute at prices like 100.005 even though the official tick is 0.01. Practical example On US equities with a 0.01 dollar tick, if the best bid is 100.50, the next possible price is 100.51. A market maker cannot quote 100.505 to split the difference and win the order; they can only quote 100.51. If the tick were smaller (say, 0.001 dollars), market makers could quote 100.505 and tighten the spread, reducing costs for traders. Tick size and trading strategies Some strategies exploit tick size. If a stock is "tick constrained" (the spread is exactly one tick), market makers have no room to improve prices and the market is less competitive. If the spread is wider than one tick, market makers have room to improve. See also - Bid-Ask Spread - Price Level - Sub-Penny Pricing - Minimum Price Variation
