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What is Tick Trading? Definition & Working

What do you think is a better investment option – trading or investing? While both options have their own share of promise, in the recent times, trading has emerged as a popular choice.

At its core, trading focuses on short-term movements in the stock market. One of the trading strategies gaining popularity is Tick Trading. It is a high-risk & high-reward strategy that depends on making split seconds decisions. In this blog post, we'll explore the detrimental aspect of Tick Trading— Tick Size.

What is Tick Size and Its Origin?

Tick size is the smallest increment/reduction of price movement a security can make. When trading physically, before the introduction of electronic trading, traders tried to capitalize on minor differences in stock prices. When they knew the smallest growth/reduction in the price of a security, they have a potential for better returns trading accordingly. Hence trading according to a tick size was a concept that is still being followed, when trading electronically.

How is Tick Size Measured?

Tick size is the minimum price movement of a trading instrument. For example, if a stock has a tick size of INR 0.05, the price can move from INR 10.00 to INR 10.05 but not to INR 10.01. The tick size is determined by the stock exchange and can vary for different instruments. It plays a crucial role in defining the liquidity and volatility of a market. Smaller tick sizes can lead to narrower bid-ask spreads, enhancing market efficiency. 

What is Tick Trading?

Tick trading is a strategy employed by traders that focuses on capitalizing on small price movements, often within the span of a single trading session. In the context of the Indian stock market, tick trading involves placing multiple trades in quick succession, taking advantage of the small increments defined by the tick size. This method is particularly popular in highly liquid markets where price movements are frequent and predictable. Traders use advanced algorithms and trading platforms to execute orders at precise moments, improving their odds within these small price variations. The strategy requires a deep understanding of market dynamics and the ability to react swiftly to changes in market conditions.

Tick trading refers to a type of trading that focuses on the smallest possible price movement in a trading instrument. In the context of the stock market, this can be a single cent or paisa. Traders who engage in tick trading look for these minimal price movements to make a profit, often executing numerous trades within a short period.

Tick trading is a type of day trading that involves making trades in very short timeframes, typically just a few seconds or minutes. It consists in taking advantage of small price movements to make a profit.

How a Tick Trading Works

Tick trading operates on the principle of exploiting the minimum price movement, or tick, in a security's price. In India, traders engaging in tick trading use sophisticated software and high-speed trading platforms to track and execute trades in real-time. They rely heavily on technical analysis, chart patterns, and market depth to predict short-term price movements. Tick trading strategies are often employed in highly volatile markets, where the price of a security fluctuates within a narrow range. Traders aim to enter and exit positions within seconds or minutes, accumulating profits from these small movements. Given the rapid pace of trading, tick traders must also manage transaction costs effectively to ensure profitability.

Tick trading involves closely monitoring the smallest price movements and making quick trades to capitalize on these changes. Traders use various strategies, including algorithmic trading, to analyze market trends and execute trades automatically. The goal is to take advantage of minute price fluctuations that occur within seconds or milliseconds. This requires a robust trading setup, advanced software, and real-time data feeds to be successful.

Components of Tick Trading 

Tick trading consists of several key components that traders must understand to be successful:

  1. Market Depth: This refers to the number of buy and sell orders at various price levels for a particular security. A deep market provides more opportunities for tick trading.
  2. Liquidity: High liquidity is essential for tick trading as it ensures that orders can be executed quickly without significant price changes.
  3. Bid-Ask Spread: The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. A narrower spread is more favorable for tick trading.
  4. Order Execution: The speed and accuracy of order execution are critical. Traders often use Direct Market Access (DMA) to place orders directly on the exchange.
  5. Risk Management: Due to the high frequency of trades, managing risk is crucial. Traders use stop-loss orders and position sizing to minimize potential losses.
  6. Transaction Costs: Even small transaction costs can add up in tick trading, so minimizing these is essential for profitability.

Tick trading comprises several essential components:

  • Tick Size: The smallest price increment.
  • Volume: The number of shares or contracts traded.
  • Time and Sales Data: Records of each trade execution.
  • Order Book: Displays buy and sell orders at various price levels.

These elements collectively influence the execution and outcome of tick trades, requiring traders to be adept at analyzing and responding to real-time data.

How Tick Size Affects Trading Tick?

Tick trading is intrinsically linked to tick size, as the latter defines the minimum price increment that can be exploited by traders. In the Indian stock market, the tick size can significantly impact the profitability of a tick trading strategy. A smaller tick size allows for more precise entry and exit points, enabling traders to capture smaller price movements. Conversely, a larger tick size may limit trading opportunities but can also reduce market noise and the likelihood of erroneous trades. Traders must carefully consider the tick size when developing their strategies, as it directly influences the potential returns and risks involved in tick trading.

Tick trading heavily depends on the tick size, as it determines the minimum price change that can occur. Smaller tick sizes can result in more frequent trades and potentially lower trading costs. Conversely, larger tick sizes might reduce the number of trades but can increase profit margins per trade. The choice of tick size affects the strategy and profitability of tick trading. 

For a tick trade to occur, there must be a minimum change in price equal to the tick size. If the tick size is too large, finding a counterparty willing to trade at that price level may be challenging. As a result, the tick's size directly impacts the market's liquidity and the traders' ability to find willing counterparties. Tick size also affects the cost of trading, as larger ticks incur more significant transaction costs. Thus, when choosing a tick size for a particular security, it is essential to strike a balance between liquidity and cost.

Several seasoned day traders and other short-term traders make quick profits from these small price movements. For more accurate results, Tick traders use special software that allows them to place trades very quickly. They often trade on multiple exchanges to take advantage of minor price differences.

Tick Size Meaning  

Tick size represents the smallest possible price movement of a financial instrument on an exchange. In the context of the Indian stock market, tick size is set by regulatory bodies such as the NSE and BSE. For equities, the typical tick size is ₹0.05, meaning that the price of a stock can move up or down in increments of ₹0.05. Tick size is crucial for maintaining market order and ensuring that price changes are smooth and predictable. It also plays a significant role in determining the bid-ask spread and the liquidity of the market, which are essential factors for traders.

Tick size is the smallest possible price movement of a trading instrument. It represents the granularity of price changes and is set by the exchange. For instance, if a stock's tick size is INR 0.01, its price can move up or down in increments of INR 0.01. Tick size is crucial for maintaining an orderly market and ensuring fair price discovery. 

The tick size is the smallest increment/reduction of price movement possible. For example, if a stock has a tick size of Rs.0.5, it can only move in increments/decrements of Rs.0.5- it can't move any less than that.

What is Tick size?

“Tick size is the smallest increment/reduction of price movement a security can make.”

Why Does Tick Size Matter?

In tick trading, the size of a tick, or the minimum price movement of a security, is an essential factor in trading. Moreover, a tick size directly impacts the liquidity of security and, ultimately, the price at which an investor can buy or sell shares. As a result, a tick size is essential because it helps ensure investors can trade stocks at a fair price.

What are the Characteristics of Tick Size

  1. It is the minimum price movement of a trading asset.
  2. It varies depending on the asset being traded.
  3. It determines how profitable a tick trade will be.
  4. It is significant for highly priced securities.
  5. It is typically set by the exchange where the security is traded.
  6. The tick sizes vary by exchange and by security. For example, the tick sizes for stocks listed on the National Stock Exchange of India (NSE) range from INR 0.05 to INR 1.
  7. Minimum Price Movement: Defines the smallest increment of price change.
  8. Liquidity: Smaller tick sizes can enhance market liquidity.
  9. Volatility: Affects the volatility of trading instruments.
  10. Market Efficiency: Influences the bid-ask spread and market depth. 

Example of Tick Size  

To better understand tick size, consider the following examples:

  1. Equity Shares: Suppose a stock on the NSE is trading at ₹100. The tick size is ₹0.05. This means the next possible price movement could be either ₹100.05 or ₹99.95, depending on market conditions.
  2. Futures Contracts: If the tick size for a futures contract is ₹0.10, and the contract is trading at ₹1,000, the price can move to ₹1,000.10 or ₹999.90, reflecting the tick size increment.

These examples illustrate how tick size operates within the Indian stock market, providing a structured and predictable framework for price movements.

In the Indian stock market, tick size plays a crucial role in determining price movements and trading strategies. Here are some key points about tick size:

  1. Current Tick Size: For a stock trading at INR 100 with a tick size of INR 0.05, the price can move to INR 100.05 or INR 99.95 but not to INR 100.01. This means that price movements are limited to INR 0.05 increments.
  2. Adjusted Tick Size: If the tick size changes to INR 0.01, the same stock can move in increments of INR 0.01, such as from INR 100 to INR 100.01 or INR 99.99. This allows for finer price movements and more trading opportunities.
  3. Impact on Trading: Smaller tick sizes can lead to higher liquidity as they allow for more precise pricing. Traders can benefit from tighter bid-ask spreads and potentially lower trading costs.
  4.   Market Efficiency: A smaller tick size can enhance market efficiency by enabling more frequent and smaller trades, which helps in better price discovery.
  5. Volatility Consideration: While smaller tick sizes offer more trading opportunities, they can also result in increased market volatility, requiring traders to adapt their strategies accordingly.

Understanding tick size is essential for traders aiming to optimize their trading strategies and capitalize on minute price movements.

The tick size is an important consideration when buying or selling shares. It is the minimum amount by which the price of a security can change. For example, a stock has a tick size of Rs. 0.5; the price can go up or down in increments/decrements of Rs. 0.5. Suppose the last traded price (LTP) was Rs.1000; then the following best bid prices for the stock shall be Rs.999.95, Rs.999.90, Rs.999.85, Rs.999.80, and Rs.999.75. Here, the tick size is set at Rs.0.05. Therefore, the bid price can not be Rs.999.87.

In India, the Securities and Exchange Board of India (SEBI) has stipulated the following Tick Sizes for stocks:

- Rs. 1 for stocks with a market capitalization of more than Rs. 10,000 crore

- Rs. 0.5 for stocks with a market capitalization of Rs.4,000 to Rs. 10,000 crore

- Rs. 0.05 for stocks with a market capitalization of less than Rs. 4,000 crores

The main reason for having different Tick Sizes for different stocks is to ensure adequate liquidity in the market for all stocks. With a large Tick Size, it would be difficult to find buyers or sellers for some of the less liquid stocks, and this would lead to wider bid-ask spreads and make it difficult for investors to trade these stocks. Thus, by having different Tick Sizes, SEBI safeguards sufficient liquidity in the market for all stocks while ensuring that investors can trade at reasonable prices.

Additionally, to guarantee that market orders are executed efficiently and at the best possible prices, SEBI has mandated that all stocks listed on Indian stock exchanges must have a tick size of Rs. 2 per share. This rule was put into effect in 2017, with a phase-in period. By requiring tick sizes for all stocks, SEBI aims to improve liquidity and tighten spreads in the market.

Conclusion:

Tick trading offers several advantages for traders, including tighter spreads, faster execution, and increased liquidity. Moreover, it is advantageous because it helps ensure prices stay close to the true value while providing better opportunities for smaller investors.

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Frequently Asked Questions

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What is tick trading in the stock market?

Answer Field

Tick trading in the stock market refers to a trading strategy that focuses on profiting from small price movements, or ticks, within a single trading session. It involves executing multiple trades in quick succession to capture these small changes.

How does tick trading affect the stock market?

Answer Field

Tick trading can increase market liquidity and reduce bid-ask spreads, making markets more efficient. However, it can also lead to increased volatility and may influence short-term price movements.

What is the difference between tick size and pip in forex trading?

Answer Field

Tick size refers to the smallest price movement in a security on a stock exchange, while a pip is the smallest price movement in forex trading, typically representing a 0.0001 change in the currency pair's value.

How is tick size determined for different financial instruments?

Answer Field

In India, tick size is determined by exchanges like the NSE and BSE, and it varies based on the type of financial instrument. Factors such as liquidity, market structure, and trading volume are considered when setting tick sizes.

What are the benefits and drawbacks of smaller tick trading?

Answer Field

Benefits of smaller tick trading include tighter bid-ask spreads and increased liquidity. Drawbacks may include higher transaction costs and increased market noise, which can lead to erroneous trades.

How does tick trading differ from other trading strategies?

Answer Field

Tick trading differs from other strategies in its focus on minute price movements and high-frequency trades. Unlike long-term strategies, tick trading involves rapid trade execution and small profit margins per trade.

How do exchanges set and update tick sizes?

Answer Field

Exchanges set and update tick sizes based on factors such as market conditions, trading volumes, and regulatory guidelines. Periodic reviews are conducted to en-sure that tick sizes remain appropriate for the current market environment.

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ADDITIONAL DISCLAIMER FOR U.S. PERSONS

Bajaj Financial Securities Limited is not a registered broker-dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition, Bajaj Financial Securities Limited is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by Bajaj Financial Securities Limited, including the products and services described herein are not available to or intended for U.S. persons. This email message does not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services and/or shall not be considered as an advertisement tool. "U.S. Persons" are generally defined as a natural person, residing in the United States or any entity organized or incorporated under the laws of the United States. US Citizens living abroad may also be deemed "US Persons" under certain rules.  

ADDITIONAL DISCLAIMER FOR CANADIAN PERSONS

Bajaj Financial Securities Limited is not a registered adviser or dealer under applicable Canadian securities laws nor has it obtained an exemption from the adviser and/or dealer registration requirements under such law. Accordingly, any brokerage and investment services provided by Bajaj Financial Securities Limited, including the products and services described herein are not available to or intended for Canadian persons.  

This mailer and its respective contents do not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services.  

DISCLAIMER FOR REPORT

DISCLOSURES UNDER THE PROVISIONS OF SEBI (RESEARCH ANALYSTS) REGULATIONS 2014 (REGULATIONS)

Bajaj Financial Securities Limited ("Bajaj Broking" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities.  

This Report has been prepared by Bajaj Financial Securities Limited in the capacity of a Research Analyst having SEBI Registration No. INH000010043 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.  

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Bajaj Financial Securities Limited and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Bajaj Financial Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time. Bajaj Financial Securities Limited or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Bajaj Financial Securities Limited is committed to providing independent and transparent recommendation to its clients. Neither Bajaj Financial Securities Limited nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of Bajaj Financial Securities Limited. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of Bajaj Financial Securities Limited and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.  

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.  

Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.  

Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.  

Research analyst has served as an officer, director or employee of subject Company: No  

Bajaj Financial Securities Limited has financial interest in the subject companies: No  

Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.  

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Subject company may have been client during twelve months preceding the date of distribution of the research report.  

There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at https://www.nseindia.com/

ANALYST CERTIFICATION

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.  

RISK DISCLOSURE ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

BROKERAGE DISCLAIMER

All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.