What a bigger tick does to a market maker's economics

Question

Consider two versions of the same \40 stock. In one, the minimum tick is \0.01; in the other, it's \0.05. In both, competition is fierce, so makers quote the tightest market the tick allows. What is the tightest possible spread in each? How much more do you capture per 1,000-share round trip under the nickel tick, and what's the downside?

Accepted Answer

Tightest spread = one tick. You can't post a bid and ask closer than one tick apart (otherwise they'd cross). So: - Penny tick: tightest market is 1 cent wide → half-spread 0.5 cent. - Nickel tick: tightest market is 5 cents wide → half-spread 2.5 cents. Capture per round trip (1,000 shares). A round trip earns the full spread: 	ext{Penny: } 0.01 	imes 1{,}000 = \10, \qquad 	ext{Nickel: } 0.05 	imes 1{,}000 = \50. So the coarser tick lets you capture 5	imes more per fill, \40 extra per round trip, for the exact same service. A wide tick is a floor under the spread that competition can't …

What a bigger tick does to a market maker's economics

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