What is Tick Trading & How it Works?

Stock prices go up and down daily, which is the essence of stock trading. However, have you ever noticed the least price move of a stock at a point? In trading, price movement of stocks is crucial to notice as the traders encash the price movements. In split seconds prices change and even a price change of a value in decimals can generate significant returns for the trader. Different traders follow different trading methods to achieve their trading goals and one such method is tick trading which will be discussed in this article.

What Does Tick Trading Mean in the Stock Market?

Tick trading is a type of trading that deals with the minimum price movement of a share of the smallest price movement. In the stock market, a tick refers to the smallest change in the share price or the value by which a stock changes at the least, and using this tick for trading is known as tick trading.

In tick trading, a trader places multiple trades within a short period to generate income from the tick size. They look for minimal price changes in the stock and place their trades accordingly. It is a form of day trading that involves shorter time frames usually involving multiple trades within seconds or a few minutes.

The traders are thus required to monitor the stock prices closely for which they want to use the tick trading method. Traders use algo-trading techniques and different strategies for tick trading and mostly automate their trades as manually trading multiple orders within a few seconds is often not possible. Apart from algorithmic trading, a dynamic trading setup is required for tick trading with highly advanced software and real-time market data.

What is Tick Size in the Share Market?

Stock exchanges determine and fix the tick size for each of the instruments in the market. Since it is the lowest value that a stock moves, it is measured in cents or basis points. For instance, if the stock exchange says NSE has fixed 0.05 as the tick size of Stock A, and the current price of the stock is ₹ 100, then the least price move that can happen for this stock is to ₹ 10.05 or ₹ 9.95. The stock cannot move to ₹ 10.02 or anything lower than ₹ 10.05 from its current price and on the other hand, it can not go to ₹ 9.98 or even 9.96.

Tick size plays a crucial role in the entire market movement. It helps in defining the volatility and liquidity of the market. The smaller the tick size is, the tighter the bid-ask spread will be and this enhances the market efficiency in turn.

How Was Tick Size Developed in Securities Trading?

Way back in time, when trading was done in a physical format which used to be known as trading pits, then amongst all the rules followed by the traders, one was the minimum price by which a stock would move either way. This minimum price has been known as tick size since the physical trading days and still, it is known the same.

While the name hasn’t changed, the size of the tick size has become smaller over time, especially after the digitization of stock trading. While the origin of tick size has many different stories around it the objective had been the same and that is preventing traders from manipulating the stock prices and offering more liquidity in the market.

What are the Key Characteristics of Tick Size?

• Minimum price movement: As mentioned above, the least a stock price can move is the tick price. In the current time, tick sizes are as small as 0.05  or more.  Usually on NSE, the range for tick sizes is between ₹0.05 to ₹ 1.
• Asset class: Tick sizes vary for different asset classes as well as for different assets. For instance, equity has a different range of tick sizes while debt can have another. Now, within equities, for different stocks, the tick sizes can be different.
• Set by Stock Exchanges: Tick sizes are set by stock exchanges across the country and even globally. In India, NSE and BSE determine the tick sizes and they also monitor the stocks and other assets following the same.

How is Tick Size Used in Stock Market Trading?

• Profitability: Tick sizes in trading are crucial for understanding and determining the profitability of the transaction. In tick trading as well as in other forms of trading, tick size is used to calculate how much profit is from a trade by gauging how many ticks the stock price moved. For instance, if a stock moved by ₹ 5 at a time where the tick size is ₹1, then it moved 5 times its tick size.
• Expensive Securities: Tick size matters the most when it comes to expensive securities. Expensive securities usually have higher tick sizes and thus even if there is one tick size change, the profit margin can be better than inexpensive stocks having higher change in price.
• Liquidity: Tick size is significant in market liquidity building. With lower tick sizes, the liquidity increases as many traders encash smaller changes in the stock prices and thus participation in the market increases which in turn increases the liquidity.
• Volatility: Similar to liquidity, the volatility is also determined by tick sizes to a significant extent. Lower tick sizes keep the volatility lower, while higher tick sizes means higher fluctuation in the stock prices and higher volatility.
• Market efficiency: With higher liquidity and lower volatility, the market efficiency increases as the bid-ask spread gets narrowed.

 Conclusion: Understanding Tick Trading and Tick Size in India

Tick sizes thus play a crucial role in building market efficiency, increasing liquidity in the share market and reduce volatility, also required for determination of profits. Thus, keeping an eye on tick sizes is crucial while trading.