What it means
Every market needs rules about how prices are quoted. If prices could be any number, traders could jump ahead of others by offering a price a tiny fraction higher.
A minimum tick prevents this by making all quotes fall on a fixed grid. The size of the tick varies.
Shares on many exchanges move in steps of one cent, while futures contracts have tick sizes designed for the product, such as a quarter of a point on a stock index or one cent per barrel on oil. The tick size matters because it sets the smallest possible gap between the buying and selling price, called the bid-ask spread.
Each tick has a monetary value, which depends on the size of the contract. Traders use tick value to measure gains, losses and risk, for example by saying a position moved against them by twelve ticks.
In futures, where contracts control large quantities, small tick moves can add up to large sums. An uptick is a trade at a higher price than the previous trade, and a downtick is a trade at a lower price.
These words were once used in regulations on short selling, and they are still used when describing how markets are moving. A zero tick means a trade at the same price as the previous one.
For managers, tick sizes affect trading costs, since a larger tick forces a wider spread, and also the profits of market makers who supply quotes. Regulators sometimes change tick sizes to improve liquidity.
Treasury staff who hedge with futures should know the tick value of the contract they use. Tick sizes also shape how orders queue.
When the tick is large relative to the price, many traders stack up at each price level, and the queue position becomes valuable. When the tick is small, traders can step ahead of the queue by offering a tiny improvement, which may discourage others from posting orders in the first place.
In practice
Real-world examples.
Example
A day trader buys a share at $25.00 and sells it at $25.12 when the tick is one cent. She has gained 12 ticks. On 1,000 shares, that is a profit of 12 x 0.01 x 1,000 = $120 before costs.
Example
A food manufacturer hedges its commodity costs using futures with a tick value of $12.50. The treasurer tells the board that a price move of 20 ticks on 10 contracts changes the hedge value by 20 x 12.50 x 10 = $2,500. This gives the board a simple way to understand daily swings, and it ties the abstract price quote to a real amount of money.
Example
A regulator reviews a pilot in which a group of low-priced shares trade with a larger tick size. The test shows that spreads widen but more orders queue at each price. The regulator uses the evidence to decide whether to extend the pilot.
Formula
Calculation
Tick value = Tick size x Contract size
Profit or loss = Number of ticks moved x Tick value x Number of contracts
Suppose a crude oil futures contract covers 1,000 barrels and the tick size is $0.01 per barrel. The tick value is 0.01 x 1,000 = $10. A hedger holding 5 contracts sees the price rise by 40 ticks, which is $0.40 per barrel. The gain is 40 x 10 x 5 = $2,000, which can be checked as 0.40 x 1,000 x 5 = $2,000.Case study
Seen in the real world.
Bayside Foods is an illustrative, fictional company that uses wheat futures to fix its flour costs. The treasurer wanted to explain to the board how the hedge would behave, and found that talk of cents per bushel confused some directors.
She prepared a one-page summary showing the tick size, the tick value and the effect of a ten-tick move on the position. For a contract of 5,000 bushels and a tick of one quarter of a cent, each tick was worth 0.0025 x 5,000 = $12.50, so a ten-tick move was $125 per contract.
In this illustrative case, the board approved a hedge of 40 contracts and agreed a loss limit of 2,000 ticks, equal to 2,000 x 12.50 x 40 = $1,000,000. The simple unit of measurement helped everyone follow the risk and made later reports quicker to read.
Watch out
Common mistakes.
- Assuming every market has the same tick size, when each exchange sets it by product.
- Confusing the tick size with the tick value, when one is a price step and the other is its dollar worth for a contract.
- Ignoring tick size when judging trading costs, although it limits how narrow the spread can be. A share with a wide tick relative to its price will always cost more to trade round trip.
Questions
People also ask.
What is an uptick?
A trade executed at a higher price than the previous trade of the same security.
Who decides the tick size?
The exchange sets it, usually under the supervision of the market regulator. Changes are announced in advance so that traders and software can be updated.
Why does tick size matter to a company?
It affects the cost of hedging and trading, and it is the unit in which futures gains and losses are measured.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related