Tick size
Also written Minimum price fluctuation · Minimum price movement
The smallest price change a contract may be quoted in — prices move only in whole multiples of it, and it differs from one commodity to another.
In plain language
A commodity price on an exchange screen cannot take any value it likes. It moves in fixed steps, and the size of the step is the tick size.
If the tick size is 10 paise, a price of Rs 100 can go to Rs 100.10 or to Rs 99.90 and to nothing in between. Rs 100.05, Rs 100.03, Rs 99.92 are simply not quotable. Every order the exchange accepts is in a multiple of the tick.
It is always expressed in the unit the physical market quotes in — rupees per 10 grams for gold, rupees per kilogram for base metals, rupees per bale for cotton.
How it works
Tick size is set per contract in the contract specification, not across the exchange, and it is a genuine design trade-off.
A large tick makes the minimum bid-ask spread wide. That is a cost to whoever crosses the spread and a reliable margin to whoever sits on it, so the workbook notes that a higher tick size generally benefits algo traders and speculators.
A small tick lets prices settle where supply and demand actually are, so a hedger can lock in closer to the price he needs — and lower tick sizes benefit hedgers.
The tick matters most to participants who trade the tick itself: algorithmic traders working tick-by-tick movement. For everyone else its practical importance runs through tick value, the rupee consequence of one tick on a full lot, and through impact cost, which cannot be smaller than one tick.
A worked example
Three contracts from the workbook, showing how differently the tick lands.
| Contract | Quotation | Lot size | Tick size |
|---|---|---|---|
| Gold (regular) | Rs per 10 grams | 1 kg (1,000 g) | Re 1 per 10 g |
| Zinc | Rs per kilogram | 5 MT (5,000 kg) | Rs 0.05 |
| Commodity index futures | Index points | 500 units | Rs 0.25 |
Gold. A tick of Re 1 on a quotation of roughly Rs 50,000 per 10 grams is a price move of 0.002% — finer than two thousandths of one per cent. But the lot is a hundred times the quotation unit, so that one rupee is Rs 100 per contract.
Zinc. A five paise tick on a quotation of, say, Rs 250 per kilogram is 0.02% of the price — ten times coarser in percentage terms than gold's — and on a 5,000 kg lot it is Rs 250 per contract.
Index futures. The workbook's design starts the index at a base of 1,000 with a minimum lot value of Rs 5 lakh, which fixes the lot at 500 units. At a tick of Rs 0.25 the smallest possible move on the contract is 500 x 0.25 = Rs 125.
Same exchange, same screen, three quite different minimum steps.
Why NISM asks about it
Chapter 3 (Commodity Futures), section 3.9, which teaches tick size and tick value together, and Chapter 6 (Trading Mechanism), where contract specifications and impact cost are covered. Questions are usually a definition ("the minimum price movement permitted") or a "which of these prices is not quotable" style item, plus the who-benefits point: higher tick size favours speculators and algo traders, lower tick size favours hedgers.
Common exam traps
- Tick size is a price step, tick value is a rupee amount. They are different numbers with different units; the exam pairs them deliberately.
- Tick size is per commodity, not per exchange. Gold and zinc on the same exchange have different ticks.
- It is quoted in the physical market's unit, which is usually not the lot unit. Gold's tick is per 10 grams while its lot is a kilogram.
- A smaller tick is not automatically better. It is better for hedgers and worse for the traders who live on the spread.
- Tick size is not the daily price limit. The tick is the smallest permitted move; the DPL or circuit filter is the largest permitted range for the day.
- Impact cost can never be less than one tick, so a wide tick puts a floor under the cost of trading that contract.
Where this is taught
- Series XVI · Chapter 2: Commodity Indicesintroduced here
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futuresintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series IV · Chapter 3: Exchange Traded Interest Rate Futuresintroduced here
- Series I · Chapter 3: Exchange Traded Currency Futuresintroduced here
- Series XVI · Chapter 3: Commodity Futures
Related terms
- Impact costThe percentage by which a market order's actual execution price degrades against the ideal price — the mid-point of the best bid and the best offer — and so the real cost of trading in size.
- Tick valueThe rupee profit or loss on one contract when the price moves by a single tick — lot size divided by the quotation factor, multiplied by the tick size.
- Daily Price LimitThe circuit breaker on a day's price movement.
- Lot sizeThe number of units of the underlying asset in one options contract.
- Quotation factorThe number of units the quoted price refers to — 10 for gold quoted per 10 grams, 1 for zinc quoted per kilogram.
- Trading unitThe quantity for which a price is quoted — for example, per 10 grams of gold.
- Interest Rate FuturesA standardised exchange-traded contract to buy or sell a notional government security, or an interest rate itself, at a price agreed today for settlement on a future date.
- Price bandThe highest and lowest price at which a contract may trade on a given day, set as a percentage of its base price to block erroneous and manipulative orders.
- Base priceThe reference price a contract starts each trading day from — the theoretical futures price on the day it is introduced, and the previous day's daily settlement price on every day after.