How Tick Sizes Shape Spreads, Queues and Your Fills

Imagine a vegetable mandi where every tomato must be priced in whole rupees. A seller who thinks a tomato is worth 40.50 rupees cannot say so. She must choose between 40 and 41, and everyone bidding against her faces the same constraint. That is, roughly, what a tick size does in a stock market: it sets the smallest step by which a price can move.

In the United States, the main rule lives in Regulation NMS, a set of market-structure rules the Securities and Exchange Commission (SEC) adopted in 2005. Rule 612, often called the Sub-Penny Rule, sets the minimum pricing increment at which quotes and orders can be displayed, ranked or accepted. For most National Market System stocks — exchange-listed shares and exchange-traded funds — priced at $1.00 or more, that increment was one cent for nearly two decades. Below $1.00, it was a tiny $0.0001.

Why a minimum step exists at all

A tick is not merely a rounding convention. It decides who gets to stand first in line. In an electronic order book, the best-priced buy order has priority; among orders at the same price, the earliest usually wins. If anyone could improve the price by an economically meaningless sliver — say, a tenth of a cent — a trader could jump ahead of an existing order at almost no cost. The industry calls this stepping ahead, or jumping the queue.

That matters because liquidity providers are taking real risk by showing their orders. If someone can overtake them cheaply, they have less reason to display size in the first place. The SEC's original logic was to protect displayed liquidity by forcing everyone to compete on meaningful price steps. Sub-penny executions, such as midpoint trades or price improvement by brokers, were deliberately left alone: a better fill price that is not a displayed quote does not displace anyone in the queue.

The tick-constraint puzzle

Over time, a problem emerged. Many highly liquid stocks were routinely quoted at exactly one cent apart — bid at $10.00, offer at $10.01 — because the penny rule stopped anybody from quoting $10.005. Regulators described these stocks as "tick constrained": supply and demand might want a narrower spread, but the increment got in the way. Investors bore the extra cost of that artificially wide gap, order after order.

The opposite risk is real too. Widen the tick too much and spreads grow, because the minimum gap becomes the practical gap. Narrow it too much and stepping ahead returns, thinning out displayed liquidity. Setting the right increment, as one observer might put it, is a Goldilocks problem with decimal points.

The 2024 amendments

On 18 September 2024, the SEC unanimously adopted amendments to Rules 612 and 610. Rather than adopting the three extra increments it had floated in 2022 — $0.001, $0.002 and $0.005 — the Commission settled on a single new tick of half a cent ($0.005) for certain stocks priced at $1.00 or more. The original one-cent tick remains for others, and $0.0001 still applies below $1.00.

Which stocks get the half-penny? The test is a stock's time-weighted average quoted spread, or TWAQS — an estimate of how tight its market is across time. Primary listing exchanges measure this over six-month cycles: January to March, with results applied from the first business day of May, and July to September, applied from the first business day of November. A stock whose average spread is around $0.015 or tighter gets the smaller increment. Estimates published around adoption suggested this would cover roughly 1,800 stocks, or close to three-quarters of them.

Two details matter for ordinary investors. First, the SEC declined to require that actual trades happen only at tick-size prices. Price improvement at finer increments survives, which preserves the better fills brokers can sometimes obtain. Second, a stock's tick can change twice a year. As one industry letter noted, this is the first time the whole industry must support two tick sizes based on lists that keep moving, rather than simply on whether a stock trades above or below a dollar. Brokers will need to explain which increment applies to your stock, and when.

Access fees: the price of reaching a quote

Alongside ticks sit access fees — the charges exchanges levy on those who take liquidity from a displayed quote, often used to fund rebates for those who provide it. This is the "maker-taker" model. Rule 610 caps those fees, previously at $0.003 per share (30 mils) for stocks at or above $1.00. The amendments cut the cap to $0.001 per share (10 mils), and to 0.1% of the quotation price below $1.00. Exchanges must also make fees and rebates knowable at the moment of execution, rather than after month-end volume tiers are tallied.

Supporters argued lower caps reduce investor costs and keep the fee small relative to the tick. Skeptics questioned the method behind 10 mils and whether the SEC should set rates at all; two commissioners favoured adoption only on a pledge of a staff study, due by May 2029, on the rules' effects. Litigation followed, and implementation timing has been contested. Put plainly: the regime is real, but not yet fully settled, and jurisdiction matters enormously — these are US rules for US-listed stocks, not a global template.

What the pilot taught

The US has run this experiment before. From October 2016 to March 2019, the SEC's Tick Size Pilot widened quoting and trading increments to $0.05 for a set of smaller-cap stocks, sorted into control and test groups, with one group also subject to a "trade-at" requirement. Academic work on the pilot pointed to a mixed picture: modest liquidity gains for some stocks, but no blanket win. A separate strand of research examined how wider ticks affected limit order book liquidity. The honest summary is that tick size is a tool with trade-offs, not a dial that only turns one way.

Queues, spreads and your stop order

Here is the practical link to fill quality. A narrower tick lets queues form at finer price levels, so the top of the book may hold less size at any single price. A wider tick pushes more size to fewer prices, creating deeper queues but wider spreads. When you place a stop order, it becomes a market order once triggered — and if the book is thin at that moment, the fill can land some distance from your trigger. Tick size shapes that depth. It does not guarantee anything.

Different markets use different vocabulary: futures traders speak of ticks and points, currency traders of pips, where a pip is typically the fourth decimal place. The underlying idea is identical — a smallest permitted step. Whatever the label, check the contract specifications; the tools are not interchangeable.

Tick sizes sound like plumbing. In practice they decide how tightly prices can compete, how deep the queue is when you arrive, and how much of a spread you cross. Worth knowing, even if nobody puts it on a mandi signboard.