Tick Sizes And Their Effect On The Buyside

ONE-TICK MARKETS

One-tick markets refer to products that are tick-constrained most of the time. By tick-constrained we mean that the minimum tick size (the increment by which prices are allowed to fluctuate) specified for a contract is so large that it puts a floor on the bid:offer and prevents natural spread tightening.

This is a little like a car manufacturer mandating that its cars must be sold in minimum increments of $250k. Fine, perhaps, if you are buying an entire fleet in one go. Rather costly if you — like the majority of consumers — are buying one or two cars.

It can be hard to launch a futures product successfully. However, once launched, there tends to be little external competition. Therefore products may not evolove at the pace they do in other more fungible marketplaces[1].

Perhaps it will surprise you to learn that many major contracts are tick- constrained more than 99% of the time. Often tick sizes were set at times when liquidity was mostly provided by human traders, spreads were much wider, and the ability of market makers to price an asset precisely was less evolved.

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