Tick
Candlefocus EditorThe purpose of the tick size is to prevent traders from continuously changing the price of a security. For example, if a tick size was set to one-hundredth of a penny, traders could have an advantage by trading multiple times at that price, making small profits for each trade. By using the one-cent tick size, the hope is that this kind of abusive trading practice is avoided.
In 2016, the Securities and Exchange Commission (SEC) undertook an experiment to increase the tick size for 1,200 small-cap companies from one cent to five cents for a period of two years in order to test the effect of larger tick sizes on trading. The findings of this experiment showed that larger tick sizes decreased trading activity and raised trading costs.
While tick sizes have had a positive impact on trading in reducing abusive practices, it can also result in traders paying a higher price than the market is actually willing to pay. For example, if the current market price of a stock is $10.02 per share, the actual price of a trade must be rounded up to $10.03 due to the one-cent tick size. This can result in traders paying more than the market price for a security.
Overall, tick sizes are an important aspect of trading that can have a great impact on the trading volume and cost of securities. It is important to be aware of the implications of tick size when trading as they can influence both trading cost and profitability.