Tick Size and Pricing

The tick size is the smallest amount a price is allowed to move — the grid that all quotes must snap to. In US equities above $1 it is one cent, so a stock can be bid at $50.00 or $50.01 but never $50.005. This sounds like a trivial housekeeping rule, but it is one of the most consequential numbers in a market: it sets a floor under the spread and decides whether traders fight over price or over position in the queue.

Why the tick sets the spread floor

The best bid and best ask can never be closer than one tick apart, because there is no legal price between them. So the tick is a hard floor on the quoted spread. In a name where the "natural" spread — what competition alone would produce — is narrower than one tick, the tick binds: the spread sits pinned at one tick and cannot narrow further, no matter how fierce the competition. When the tick binds, price competition is over, and the only way to compete is to be earlier in the queue.

The key ratio is the tick relative to the price. A one-cent tick means something completely different on a $5 stock than on a $500 stock:

$$\text{relative tick} = \frac{\text{tick size}}{\text{price}}.$$

Here the tick size is the minimum increment in dollars and the price is the stock's level; the ratio (often quoted in basis points, where one basis point is $0.01\%$) tells you how "coarse" the grid feels. A large relative tick makes the grid coarse and the spread wide in percentage terms; a small relative tick makes it fine.

Two regimes

Whether the tick binds splits stocks into two worlds with opposite mechanics:

	Large-tick stock	Small-tick stock
Relative tick	Large (grid feels coarse)	Small (grid feels fine)
Spread	Pinned at one tick	Floats above the tick
What traders compete on	Queue position (time)	Price (undercut by a tick)
Queue length at touch	Long	Short
Who wins	Fastest, front-of-queue	Best price / most patient
Example	Low-priced, liquid name	High-priced or thin name

Worked example

Two liquid stocks, both with a one-cent tick:

• Stock A trades near $8. Relative tick $= 0.01 / 8 = 0.00125 = 12.5$ basis points. The natural spread would be well under a cent, so the tick binds: the market sits one cent wide (about 12.5 bps), a huge percentage spread. With the spread frozen, everyone piles into the queue at the best bid and ask, so those queues are enormous — thousands of shares deep — and a fill is mostly about how early you arrived.
• Stock B trades near $500. Relative tick $= 0.01 / 500 = 0.00002 = 0.2$ basis points. Here a cent is negligible; the natural spread is many ticks wide, so the tick never binds. Traders undercut each other freely — bidding $499.98, then $499.99 to jump ahead — and the queues at any single price are short because it is cheap to step in front by a tick.

Same one-cent tick, opposite games. On Stock A your edge is speed and queue discipline; on Stock B your edge is willingness to improve the price.

Getting the tick wrong, in both directions

Regulators tune tick sizes deliberately, and both extremes hurt:

• Too small a tick lets traders jump the queue by improving the price a trivially small amount, which discourages anyone from posting real size (why show liquidity if you'll be stepped in front of for a hundredth of a cent?). This is exactly why the US sub-penny rule forbids quoting stocks above $1 in increments finer than a cent — to keep the queue meaningful.
• Too large a tick forces an artificially wide spread, making every round trip more expensive for investors and inflating market-maker profits. The 2016-2018 SEC Tick Size Pilot widened ticks on a set of small-cap stocks to test whether coarser grids improved liquidity; the results were mixed, spreads widened as expected while trading volume generally fell.

Why it matters downstream

Tick size ripples into almost everything else in execution. It sets how much imbalance information the visible book carries (long queues in large-tick names make imbalance a strong signal), it governs whether maker rebates can flip a passive fill profitable, and it is the reason the same execution algorithm behaves completely differently on a $5 stock and a $500 stock. Whenever a microstructure result seems to contradict itself across two names, the first thing to check is whether the tick binds.