Why the "tick size" as the minimum unit of price fluctuation dominates the market

When trading in financial markets, there is a minimum price unit that “won’t move” at a certain price level. This is called the tick size. At first glance, this concept may seem modest, but did you know that it actually has a significant impact on investors’ profits and losses as well as overall market liquidity?

The Essential Basics of “Tick Size” Every Investor Must Know

Tick size refers to the minimum price fluctuation unit of securities or commodities. For example, in U.S. stocks, the standard is $0.01 (1 cent), meaning the stock price cannot move in increments smaller than $0.005 and must move in $0.01 units. In futures trading and Forex, it can be $0.05 or more, and in foreign exchange, it is often 0.0001 currency units (pips), varying by market and asset.

Why is this mechanism important? Because it brings order to the market and ensures predictability in price determination. Without this rule set by exchanges, prices would become chaotic.

Is a Smaller Tick Size Truly More Advantageous?

Direct Impact on Liquidity

The smaller the tick size, the narrower the bid-ask spread, allowing investors to trade at lower costs. With a $0.01 tick, orders can be placed more precisely than with a $0.05 tick, increasing market depth and making trades easier to execute.

Conversely, larger tick sizes lead to wider spreads and higher trading costs. However, this also reduces market noise and volatility—a trade-off.

Impact on Trading Strategies

High-frequency traders (HFT) and scalping strategies prefer markets with small tick sizes to profit from tiny price movements. On the other hand, traders focusing on larger price swings may find larger tick sizes more suitable.

How Do Major Exchanges Around the World Handle Tick Sizes?

The New York Stock Exchange (NYSE) and NASDAQ still predominantly use a $0.01 tick size for most stocks. In 2016, the U.S. conducted a “Tick Size Pilot Program,” increasing the tick size for small and mid-cap stocks to $0.05 to evaluate how market quality and liquidity would change.

Globally, exchanges like the Tokyo Stock Exchange and London Stock Exchange operate similar tick size systems, with adjustments based on currency and asset type. Forex trading, in particular, commonly uses very small tick sizes like 0.0001 units.

Key Points for Technology and Investors to Keep in Mind

From a technical perspective, accurate implementation of tick size in trading platforms and algorithms is essential. Systems must recognize price fluctuations instantly and execute orders at optimal prices.

For investors, understanding tick size directly affects trading profitability. Day traders and algorithmic traders, in particular, need to consider trading costs, slippage, and execution speed—all influenced by tick size. Knowing the tick size of the securities you trade and adjusting your strategies accordingly can be the key to success.

The Current State of Tick Size in the Cryptocurrency Market

Cryptocurrency trading, like traditional financial markets, sets tick sizes to maintain market order even in highly volatile environments. Because crypto markets are more unpredictable, this minimum price unit helps balance price stability and trading efficiency.

Ultimately, tick size is not just a technical specification; it underpins market structure, affecting liquidity, trading costs, market depth, and investment strategies. By understanding and utilizing this element, exchanges, system engineers, and investors can contribute to a more efficient and fair trading environment.