Tick Size
Candlefocus EditorTick Size was once quoted in fractions, like 1/16th of $1. This is due to the limitations of the mechanical tools used in the early stock market exchanges. Today, ticksizes are predominantly based on decimals and expressed in cents. For example, for many stocks the tick size is $0.01, however fractions of a cent may also occur.
Currencies and fixed income markets use different tick sizes, such as ’pips' or ’bps’. A pip is the smallest price move in a forex pair and is usually equivalent to a change of 0.0001, while a basis point (1/100th of 1%) is used in bond markets and is used as a unit of measure in yield changes or interest rate differentials.
In the past, some regulators have influenced the Tick Size in order to encourage more liquidity and fairer trading between buyers and sellers. For example, the European Securities and Markets Authority recommended larger Tick Sizes for some classes of securities in order to boost the competitiveness of mid and small cap stocks.
Tick Size is important for algorithmic trading strategies in order to ensure optimal trade execution and low latency. It is also important for high-frequency trading due to the ability to respond quickly to relatively small fluctuations in the market.
Overall, Tick Sizes are essential for traders to have an accurate picture of the market’s movements and for regulators to ensure an even playing field for trading. With the rapid development of technology and automation, the Tick Size is becoming increasingly important for traders to understand and utilize.