Tick size is the minimum permitted price increment under the trading rules for an instrument. It determines the price grid on which an order may be quoted. A valuation model can produce any decimal price; a trading system must translate that value into a permitted order price while preserving the trader's price constraint.
The applicable rule belongs to a particular instrument, venue and trading context. It is not a promise that successive trades move by exactly one tick: trades can repeat at the same price or jump across several ticks.
The five-cent grid
Suppose a fictional share market accepts order prices in increments of USD 0.05 per share, measured from a zero origin. Within the permitted price range, its grid is
Here is the grid origin and is the tick size. The zero origin is an explicit convention of this example, not something to infer for every instrument.
| Proposed order price, USD per share | On this grid? | Reason |
|---|---|---|
| 100.00 | Yes | A whole multiple of 0.05 |
| 100.05 | Yes | One tick above 100.00 |
| 100.03 | No | Between two permitted prices |
The model price 100.03 lies 0.03 above 100.00 and 0.02 below 100.05. Being nearer the upper price does not make that price the right order instruction. For a limit order to buy with a maximum price of 100.03, rounding up to 100.05 would breach the ceiling. A bid at 100.00 respects the ceiling but changes the instruction and may reduce its chance of execution. For a sell with a minimum price of 100.03, the directions reverse: 100.05 respects the floor, while 100.00 breaches it. Rejecting an off-grid instruction and asking the strategy for a valid price is another possible policy.
Original fictional price grid, quoted in USD per share with a zero origin. Filled points are valid grid prices; the X is an off-grid model price. The grid alone does not determine whether an order will be accepted or filled.
A tick is not the spread
The bid–ask spread is the gap between the best quoted ask and bid. With a bid of 100.00 and an ask of 100.10, the spread is USD 0.10 per share, or two ticks on this grid. Tick size supplies the price unit; the spread describes the current quotes.
The valid price 100.05 lies strictly between those quotes. A new bid there would improve the best bid under the stated snapshot, but its eventual fill depends on incoming orders, available quantity and the venue's priority rules. If instead the quotes are 100.00 and 100.05, there is no permitted price strictly between them on this grid. The Order Books lesson develops the next step: how displayed depth and queue priority affect execution (membership required for the full lesson; public preview available).
A derived statistic need not be a valid order price. The midpoint of the one-tick quotes 100.00 and 100.05 is 100.025. It remains a meaningful benchmark even though it cannot be submitted as an order price in this fictional market. Average execution prices can likewise fall between grid points. Do not apply an order-price validity test indiscriminately to every field in a market-data set.
Price increment, quantity and money per tick
Lot size concerns quantity: how many shares, contracts or other units a lot represents. It does not specify the tick size.
Tick value converts a one-tick price change into a monetary change for a specified contract or position. For a linear futures contract quoted in price points, with a multiplier in USD per point per contract,
For a fictional future with a 0.25-point tick and a USD 20 per point per contract multiplier, one tick is worth USD 5 per contract. Tick size, multiplier and contract count must all have compatible units before calculating position profit or loss. CME's tick-size introduction explains the same conversion using its own contract examples.
Use the rule that applied to the observation
Real price grids can depend on the price band, instrument class, venue, order type or session. A rule change can also alter the grid over time. CME's pricing documentation distinguishes standard ticks from variable tick tables; HKEX's minimum-spread changes illustrate price-band and effective-date dependence. In HKEX's terminology, a “minimum spread” is a permitted price increment, which should be distinguished from the observed bid–ask spread above.
For live order validation, read the applicable instrument specification and venue rules, including boundary conditions and any exceptions. For a historical backtest, use the rule effective at the observation time. Crossing a price-band boundary requires the actual schedule, not indefinite extrapolation of the last tick. A smaller tick creates a finer grid; it does not by itself guarantee a narrower realised spread or deeper liquidity.
Sources
- Rishi K. Narang, Inside the Black Box: A Simple Guide to Quantitative and High-Frequency Trading, second edition, Wiley, 2013, Chapter 7, “Aggressive versus Passive,” pp. 120–124, especially pp. 123–124 on improving a quote inside a spread and minimum tick constraints. The numerical examples and figure above are original.
- CME Group — Tick Movements: Understanding How They Work: tick size, contract specificity and monetary tick value.
- CME Group — MDP 3.0: CME Globex Pricing, “Tick Size Calculation” and “Variable Tick Table”: standard and price-dependent tick rules.
- HKEX — Reduction of Minimum Spreads: instrument scope, price bands and phased rule changes. Official pages checked 27 October 2026.