Tick Size Is Market Design

A one-cent tick is a five basis point floor on the quoted spread of a twenty-dollar stock and a quarter of a basis point floor on a four-hundred-dollar one. The same rule, applied uniformly, constrains one security twenty times more tightly than another. In its 2024 adopting release the SEC put a figure on how much that matters: up to 74.3 per cent of the share volume transacted in NMS stocks in 2023 may have had spreads constrained by the minimum increment.

Figure 1 is that arithmetic, with real closing prices marked on it. Ford at 13.84 dollars cannot be quoted tighter than 7.2 basis points. SPY at 761.78 has a floor of 0.13. Nothing about those two securities is being compared except where the rounding rule bites.

Section 01What a tick actually does

The tick floors the spread: the best bid and best offer cannot be closer than one increment. Where the spread the market would otherwise set is wider than a penny, the floor is slack and irrelevant. Where it is narrower, the floor binds, and the consequences are not confined to the spread itself.

A binding floor makes queue position valuable. If no participant may improve the price by less than a penny, the only way to gain priority is to arrive earlier at the same price, so the competition that would have taken the form of price improvement takes the form of speed instead. Displayed depth accumulates at the touch because there is nowhere finer to go, and the economic surplus that a narrower spread would have delivered to the taker is competed away in latency rather than in price.

That is the reasoning behind the September 2024 amendments. The Commission adopted a single sub-penny increment of 0.005 dollars, applying to quotes and orders priced at or above one dollar in NMS stocks whose time weighted average quoted spread is 0.015 dollars or less. It declined to adopt a minimum increment for trades, and it declined the finer 0.002 and 0.001 tiers it had proposed. Issue 016 sets out those parameters alongside the access fee caps and the compliance dates, each machine-read from the release that set it.

Section 02Fees, rebates, and routing

The tick does not act alone. Most US exchanges run a maker-taker model: a fee charged to the order that removes liquidity funds a rebate paid to the order that posted it. When the spread is pinned at one tick, that fee is a large fraction of the total economics of the trade, which is why the Commission reduced the access fee cap for protected quotations priced at or above a dollar from thirty mils to ten, and the sub-dollar cap from 0.3 to 0.1 per cent of the quotation price.

Routing is where the incentives become a conflict. A broker choosing a venue can be pulled toward the one paying the best rebate rather than the one offering the best execution, and the two need not coincide. The Commission's parallel requirement that exchange fees and rebates be determinable at the time of execution addresses the informational half of that problem: a router cannot weigh a cost it will not know until the month-end invoice.

Section 03Incentives in the order book

Figure 2 puts the chain in order. Two policy levers, the tick and the fee cap, set the spread floor and the rebate economics. Those determine the value of queue priority, which determines how much depth participants will display and where, which determines what a router can find and what a taker actually pays.

There is precedent for taking the dial seriously in both directions. The SEC's Tick Size Pilot of 2016 to 2018 deliberately widened ticks for a sample of smaller stocks in order to study the effect, and produced evidence on quoting behaviour and displayed depth that informed the debate. The 2024 amendments move the dial the other way for a different population, and the mechanism by which they act is the same one.

minimum quotable spread, in basis points  =  10000 * tick / price

    price      one cent      half cent
    ------     --------      ---------
    $5           20.00 bp      10.00 bp
    $20           5.00          2.50
    $50           2.00          1.00
    $100          1.00          0.50
    $400          0.25          0.12

This is arithmetic, not a measurement. It is a floor on the quoted
spread and not a prediction of it: most liquid securities quote wider
than the floor, and the constraint binds only where the two are close.

Adjusting the tick does not change the traders. It changes what they are paid to do.

What this article deliberately does not contain is a before-and-after study of quoted spreads around the rule change. That measurement needs consolidated quote data, which is licensed, and Rule 605 reports are filed per market centre in a form that does not aggregate into a clean panel without assumptions this journal cannot verify. A published estimator that works from daily high and low prices was tried and rejected; the reasoning is recorded in Issue 016 and the script is preserved in the repository. The tick is best understood here as a constraint in an optimisation problem whose parameters are now precisely documented, with the effect on execution quality left as the open empirical question it is.

This research is analysis and commentary for general information. It is not investment advice, an offer, or a solicitation, and it contains no price forecasts. Regulatory parameters are quoted from the release cited and are verified against its text by the script that draws the table in Issue 016.