Tick Size
Definition
Tick Size is the minimum price increment. Affects how precisely you can place/cross orders and the spread granularity.
What is Tick Size?
The smallest possible price movement in a market:
- Example: $0.01 (1 cent)
- Limits precision: Can't trade at $0.455, only $0.45 or $0.46
- Affects spreads: Minimum spread = 1 tick
- Platform-specific: Different markets may vary
Common Tick Sizes
Prediction Markets
| Platform | Tick Size | |----------|-----------| | Kalshi | $0.01 (1¢) | | Polymarket | $0.01 (1¢) | | PredictIt | $0.01 (1¢) |
Traditional Markets (Comparison)
| Market | Tick Size | |--------|-----------| | US Stocks >$1 | $0.01 | | US Stocks <$1 | $0.0001 | | Futures | Varies by contract | | Forex | 0.0001 (pip) |
Why Tick Size Matters
Spread Width
Minimum spread equals one tick:
- Tick = $0.01: Tightest spread is 1¢
- Bid $0.50, Ask $0.51: One-tick spread
- Can't have: $0.505 midpoint
Order Placement
Your limit orders must use tick increments:
- ✓ Valid: $0.50, $0.51, $0.52
- ✗ Invalid: $0.505, $0.517, $0.5225
Price Improvement
Limited by tick size:
- Can only improve by 1¢ increments
- Fine-tuning restricted
- Jump to better price = full tick
Impact on Trading
Tight Spreads
When prices near $0.50:
- Spread: $0.49 bid, $0.50 ask (1¢ = 2%)
- Reasonable transaction cost
- Good for trading
When prices near extremes:
- Spread: $0.01 bid, $0.02 ask (1¢ = 100%!)
- Huge percentage cost
- Difficult to trade
Price Discovery
- Coarser at extreme probabilities
- Smoother around 50%
- Affects accuracy at tails
Market Making
- Minimum profit = 1 tick
- Need volume to earn meaningful amounts
- Competition keeps spreads tight
Example Scenarios
Scenario 1: Mid-Range Price
Market at $0.50:
- Tick: $0.01
- Spread: 2% ($0.49 / $0.50)
- Bid: $0.49
- Ask: $0.50
- Impact: Minimal, easy to trade
Scenario 2: Low Price
Market at $0.05:
- Tick: $0.01
- Spread: 20% ($0.01 / $0.05)
- Bid: $0.04
- Ask: $0.05
- Impact: High cost, harder to trade
Scenario 3: Very Low Price
Market at $0.02:
- Tick: $0.01
- Spread: 50% ($0.01 / $0.02)
- Bid: $0.01
- Ask: $0.02
- Impact: Extreme cost, nearly untradeable
Trading Strategies
Joining the Queue
With 1¢ ticks:
- Can't undercut by fraction
- Must match bid/ask exactly
- First in line = first filled
- Time priority matters
Penny Wars
Market makers compete:
- Improve bid by 1¢
- Improve ask by 1¢
- Race to best price
- Spreads compress to 1 tick
Picking Your Spot
At $0.50:
- Set limit at $0.49 (patient buyer)
- Or pay $0.50 (immediate execution)
- Only two choices
At $0.03:
- Set limit at $0.02 (33% below)
- Or pay $0.03 (50% above)
- Large percentage jumps
Smaller Tick Sizes
Hypothetical $0.001 Tick
Advantages:
- Tighter spreads possible
- More precise pricing
- Better at extreme probabilities
Disadvantages:
- More complexity
- Slower markets (more prices)
- Minimal benefit at mid-range
Why $0.01 is Standard
- Simple: Easy to understand
- Sufficient: Good enough for most cases
- Historical: Matches currency
- Technology: Database efficiency
Tick Size and Volatility
Fast Markets
- Prices jump multiple ticks
- Order flow uneven
- Spreads widen temporarily
- Liquidity gaps
Slow Markets
- Prices move one tick at a time
- Steady progression
- Tight spreads maintained
- Gradual discovery
Advanced: Sub-Penny Trading
Not Available in Prediction Markets
Most platforms prohibit:
- Reduces incentive for market makers
- Creates front-running opportunities
- Complexity not worth benefits
Used in Other Markets
- Dark pools
- Some forex
- Institutional trading
- Special protocols
Tick Size Effects
On Bid-Ask Spread
Minimum Spread = 1 tick
Percentage Cost = Tick / Price
Examples:
- @ $0.50: 1¢ / 50¢ = 2%
- @ $0.10: 1¢ / 10¢ = 10%
- @ $0.02: 1¢ / 2¢ = 50%
On Position Sizing
With 1¢ tick:
- Enter/exit costs minimum 1¢
- Small positions feel it more
- Larger positions amortize cost
- Need volume to overcome
Practical Tips
Understanding Your Cost
Before trading:
Effective Cost = (Tick / Entry Price) × 100%
Account for Ticks
In strategy:
- Include spread in EV calculations
- Factor round-trip cost (2 ticks)
- Scale position to justify friction
Avoid Extreme Prices
- High percentage costs
- Difficult to exit
- Better opportunities elsewhere
- Unless strong conviction