The term tick size refers to the minimum price increment by which a stock, futures contract, or exchange-traded instrument can increase or decrease. While the tick size for common stock is standardized, it will vary by the underlying asset type in the futures market.
The minimum price movement of a trading instrument (common stock, option, futures contract) is referred to as its tick size. These discrete price levels were established to create a balance between time preference and price preference. For example, if a tick is too small (price priority) then traders have little incentive to place orders in advance, since another trader can move ahead of them using a price that is virtually the same. The opposite happens if the tick is too large (time priority), since traders will have to wait until the value of the underlying moves enough to satisfy the tick size before a new bid can be placed.
The minimum price movement of a common stock is $0.01, or one cent in terms of USD. Futures contracts have a standardized but varying tick size that, when coupled with a standard contract size, produces a tick value. This value is the impact the tick size has on a standard contract as shown in the examples below:
|Product||Contract Size||Tick Size||Tick Value|
|Gold||100 troy ounces||$0.10||$10.00|
|Euro (currency)||125,000 euro||$0.0001||$12.50|
|Crude Oil (mini)||500 barrels||$0.025||$12.50|
Note: Multiplying the tick size by the contract size produces the tick value.