Execution & trading costs

Tick size

Tick size is the smallest permitted price increment for a security’s displayed quotes or orders under the rules of its trading venue.

What it means

A stock’s quoted price cannot always move in arbitrarily small steps. Its trading venue specifies the price increments allowed for quotes and orders. If the applicable tick size is US$0.01, for example, US$20.00 and US$20.01 are valid price levels, but US$20.005 is not.

Tick size is a rule about price granularity, not a measure of how much a stock typically moves. The applicable increment can differ across securities, venues and price ranges. A stock can also move by several ticks at once when the next available quote is farther away.

How it is calculated

Tick size is normally specified by market rules rather than calculated from historical prices. Once the applicable increment is known, the number of ticks between two valid price levels can be calculated:

Number of ticks = |Price B − Price A| ÷ Tick size

  • Price A and Price B are two valid prices, in currency units per share, such as US$ per share.
  • Tick size is the applicable minimum price increment, in the same currency units per share.
  • Number of ticks is a count, with no currency unit.

When a constant tick applies across the prices compared, the result is a whole number. If the applicable increment changes between the two prices, check the relevant price bands rather than applying one tick size throughout.

The tick size can also provide a lower bound on a positive displayed spread when both bid and ask must use the same price grid. It does not tell you what the actual spread will be: that depends on the available quotes.

Worked example

Assume a hypothetical stock trades on a venue with a US$0.01 tick size at the prices below. Its best displayed bid is US$25.00 per share, and its best displayed ask is US$25.03 per share.

  1. The displayed bid-ask spread is US$25.03 − US$25.00 = US$0.03 per share.
  2. Divide by the tick size: US$0.03 ÷ US$0.01 = 3 ticks.
  3. A proposed buy limit price of US$25.005 per share is not on this hypothetical venue’s price grid. US$25.00 and US$25.01 are valid price levels.
  4. At the displayed ask of US$25.03, a hypothetical 100-share purchase has a quoted value of 100 × US$25.03 = US$2,503, before fees. The quoted ask is not a guaranteed fill price or a guarantee that 100 shares are available there.

The three-tick spread reflects the example’s quotes. It does not mean the venue requires a three-tick spread.

Why it matters before you trade

Tick size limits the price precision of a limit order. Before entering one, check the increment that applies to that stock, venue and price level; an off-grid price may be rejected or handled according to broker and venue rules.

It also gives context to the bid-ask spread. A US$0.01 tick represents 0.04% of a US$25.00 share price, but 1% of a US$1.00 share price. These percentages compare one tick with the stated share prices; they are not estimates of total trading cost. Spreads may span multiple ticks, and commissions, market impact and the eventual fill price can matter too.

A finer price grid permits more possible quote levels, but it does not by itself guarantee a narrower spread, deeper liquidity or a better execution. Quoted prices and available share quantities both matter.

How PreTrAIde uses it

PreTrAIde’s pre-trade analysis estimates the bid-ask spread for each stock using a liquidity-tier model with a volatility uplift and a one-tick floor. That floor prevents its estimated spread from falling below one tick. The estimate is part of a broader quantitative assessment that also includes participation in daily volume and estimated market impact.

A user builds a stock basket with sides, quantities and execution conditions before placing any order. PreTrAIde returns decision-support verdicts and reasoning; it does not receive, transmit or execute orders. A spread estimate is not a live quote or a guaranteed execution cost.

Common mistakes

  • Equating a tick with the spread. A positive displayed spread can be one tick or several ticks.
  • Treating one tick as a fixed percentage. Its percentage of the share price changes as the price changes.
  • Assuming every stock has the same tick. Check the applicable market rules and price band.
  • Confusing tick size with the smallest possible price move. Consecutive trades can occur several ticks apart.
  • Assuming a valid limit price will fill. The price grid says which prices are permitted, not whether shares will trade at them.

Frequently asked questions

Is tick size the same as bid-ask spread?

No. Tick size is a permitted price increment; the bid-ask spread is the difference between the best displayed ask and bid. A positive spread can cover one or multiple ticks.

Can I place a limit order between two ticks?

A limit price generally must follow the price increments applicable to that security and venue. An off-grid order may be rejected or handled under broker and venue rules.

Does a smaller tick size mean lower trading costs?

Not necessarily. A smaller tick allows finer price increments, but the actual spread, available liquidity, market impact, fees and fill price also affect trading costs.

Related terms

Bid-ask spread Bid-ask spread is the difference between the lowest displayed price to sell a stock (ask) and the highest displayed price to buy it (bid), measured per share. Limit order Limit order is an instruction to trade at a specified price or better: a buy cannot execute above its limit, and a sell cannot execute below its limit. Order book Order book is a record of currently available buy and sell orders for a security, organized by price and quantity, that shows displayed liquidity at a particular venue or across specified venues. Execution cost Execution cost is the amount paid to complete a trade beyond a chosen reference price, including the effect of the fill price and, when specified, trading fees. Liquidity Liquidity is the ability to buy or sell an asset promptly in the desired quantity without substantially moving its price or incurring excessive trading costs. Pre-trade analysis Pre-trade analysis is the assessment of a proposed stock order or basket before placement, estimating execution costs, liquidity and risk to inform the investor’s decision and execution approach.

Execution & trading costs

Post-trade analysis Transaction cost analysis (TCA) Effective spread Realized spread Midpoint price Slippage Market impact Implementation shortfall All glossary terms →

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Educational content, not investment advice. PreTrAIde is analysis software, not a broker: it never executes orders, and its verdicts are decision support, not recommendations to buy or sell.