Definition and Examples of Tick Size
According to the New York Stock Exchange, tick size represents "...the smallest difference between the highest buy price and lowest sell price that can be displayed." For an average trader, this means that the minimum distance between price changes cannot be displayed in less than $.01 increments.
For example, if you're looking at a trading chart and watching a stock's price drop, you would see it happen in $.01 increments. This doesn't mean you're paying $.01 more than the previous price on a stock if it goes up a tick; it's merely the tick size. Tick size is used in conjunction with lot sizes or other measurements to determine price and value changes.
Tick sizes are different based on the type of instrument and the exchange they are traded on, as is each instrument's tick value.
How Tick Size Works
The New York Stock Exchange uses a tick size of $.01 for stocks that trade for under $1.00. Stocks are also commonly sold in lots of 100 shares, so a $5 stock contract size would be worth $500. If price moves one tick, $500 is at risk.
Traditionally, ticks represented a fraction of a dollar in U.S. markets. The fraction used to be in divisions of one-eighth of a dollar ($0.125). For a short time, it was one-sixteenth of a dollar ($0.0625).
Futures markets such as the Chicago Mercantile Exchange (CME) have tick sizes and movements determined by commodity. For example, the E-mini S&P 500 futures contract has a tick size of one-quarter of an index point. One index point equals $50, so one tick movement equals $12.50.
No two contracts move the same amount each day, relative to other futures contracts.
The NYMEX WTI Crude Oil has a tick size of $.01, but one contract size is 1,000 barrels—so one tick movement for NYMEX WTI Crude Oil is $10. When you know the tick value and contract size of a particular instrument, you know how much the price on one contract can move at any given time. This is the minimum amount you can shift your offer for that instrument up or down.
What It Means for Individual Traders
Not knowing the tick size and tick value of the futures contract you are trading can result in taking position sizes that are too big or small, relative to your expectations. For example, during a particular trading period, the E-Mini S&P 500 futures contract could move an average of 70 ticks ($875); crude oil futures might move 150 ticks ($1,500).
Notice that even though the tick values are not too different for both contracts—$12.50 and $10, respectively—one market moves much more than the other. You would want to compensate for that difference when deciding how many contracts to trade.
There has been debate about whether increasing tick sizes in small-cap markets might be beneficial. The SEC even conducted a pilot test in this regard, randomly raising the tick size from $0.01 to $0.05 on some stocks. They found no significant impact from this test.
How to Get an Asset's Tick Size
Generally, you need only go to the website of the exchange the asset is traded on to find tick sizes. Here are the tick values for some of the most commonly traded futures contracts:
- The Euro FX (6E) futures contract has a tick size of 0.00005 U.S. dollars per euro. A contract is for 125,000 euros, so its price will move in increments of $6.25.
- The E-mini S&P 500 (ES) futures contract has a tick size of one-quarter of an index point. The dollar amount per move is $12.50, because the contract unit is $50.
- Crude oil futures move in increments of $0.01 per barrel. Because a contract is for 1,000 barrels, the dollar value moves in increments of $10.
- Gold (GC) futures have a tick size of $0.10 per troy ounce. A contract is for 100 troy ounces, so the contract price moves in increments of $10.
- Natural gas futures (NG) move in $0.001 increments per million British thermal units (MMBtu). Because a contract is for 10,000 MMBtu, the price moves $10 at a time.
- A tick measures the smallest allowable movement in value that a particular financial asset can make on the market.
- Tick sizes vary, depending on the asset and the exchange it is traded on.
- The tick value was historically a fraction based on eighths of a dollar, such as $0.0625 or $0.125, but the SEC now requires they be based on hundredths of a dollar ($.01).