Tick Size Is Market Design

A tick is the smallest amount by which a price is allowed to change: a penny, or now in some cases half a penny. It sounds like the kind of detail that lives beneath notice, a market's rounding convention. It is in fact one of the most powerful levers in market design, because the tick sets the economics of providing liquidity, and the economics of providing liquidity decide how deep, how stable, and how fair a market is. Change the tick and you change who can profitably quote, how much size they will show, and what price the next order receives. Market design is policy, written in increments too small to see.

Section 01What a tick actually does

The tick floors the spread: the distance between the best bid and the best offer cannot be narrower than one tick. For most stocks a penny is fine. For the most liquid names it can be too wide, because the spread wants to be tighter than a penny and is not allowed to be. When that happens, competition cannot express itself in price, so it moves to the queue. Many participants post the same price and contest priority by speed and by time, building long queues of displayed size, and the value of being early in that queue becomes the thing worth paying for. A wide tick, in other words, makes queue position valuable and tends to produce deep, slow-moving books; a narrow tick makes it cheap to better the price by a tick and tends to produce tighter but thinner ones.

This is the logic behind the September 2024 amendments to Regulation NMS. The SEC adopted a second minimum increment of half a cent, $0.005, for qualifying stocks with sufficiently tight time-weighted average quoted spreads. The Commission estimated that the increment would apply to nearly 1,800 stocks representing roughly two-thirds of share volume. Implementation did not proceed on the original schedule: after litigation and temporary relief, compliance with the amended minimum increment and access-fee cap is due on the first business day of November 2026. The design question remains the same even when the calendar moves.

Section 02Fees, rebates, and routing

The tick does not act alone. Most US exchanges run a maker-taker model: they charge a fee to the order that takes liquidity and pay a rebate to the order that posted it, and the rebate is funded by the fee. Because the access-fee cap bounds the rebate, it sets the size of the inducement an exchange can offer a market maker to display size. The same 2024 rulemaking cut that cap sharply, from $0.003 to $0.001 per share for stocks at or above a dollar, a reduction from thirty mils to ten. Shrink the rebate and you change the calculus of posting liquidity and, with it, the incentives that route orders between venues.

Routing is where these incentives become a conflict. A broker choosing where to send an order can be pulled toward the venue that pays the best rebate or charges the lowest fee, which is not necessarily the venue that gives the client the best fill. That tension is part of why the same package of reforms also widened odd-lot transparency, requiring the consolidated tape to identify the best odd-lot order. In high-priced stocks much of the real, better-priced liquidity sits in odd lots that the official best bid and offer never showed; making it visible narrows the gap between the price a tape advertises and the price actually available.

quoted_spread  >=  minimum_tick

maker economics depend on:
    expected spread capture + rebate
    - adverse selection - inventory risk - messaging cost

smaller tick  -> cheaper price improvement, lower queue rents
lower fee cap -> smaller maximum maker rebate

Section 03Incentives in the order book

Figure 9 puts the chain in order. Two policy levers, the tick and the fee cap, set the spread floor and the rebate economics; those set the value of queue priority; that sets how much depth participants are willing to display; that shapes how routers choose between venues; and that, finally, determines the execution quality a given order receives. Nowhere in the chain do the traders change. What changes is what they are paid to do. This is the same proposition this series develops elsewhere, that market microstructure is policy executed at machine speed, viewed through a single dial.

There is precedent for taking the dial seriously. The SEC's Tick Size Pilot of 2016 to 2018 deliberately widened ticks for a sample of smaller stocks to study the effect, and the evidence it produced, on quoting, on displayed depth, and on trading costs, fed directly into later policy. The lesson for a research desk is practical. A strategy that depends on capturing rebates, or on holding queue priority, or on the depth a particular tick regime supports, is exposed to a change in the rules as surely as to a change in price. The tick is not a constant of the market. It is a parameter the regulator can turn, and turning it rewrites the economics of everyone who trades inside it.

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

The tick is best understood as a constraint in an optimisation problem. It does not determine market quality by itself, but it changes the relative return to price improvement, queue position, and liquidity provision. Access fees add a second price system beside the displayed quote, while odd-lot transparency changes what the public benchmark can see. Market design resides in their interaction, and execution research that treats those parameters as permanent will eventually mistake a rule change for signal decay.

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 descriptions summarise the cited sources; the interpretation is the author's.