Applying Exchange Tick Tables to Price Rounding and Quote Decisions
Summary
The document explains how to interpret a price tick table when adjacent price bands leave apparent gaps. In the example, prices through 1,000 use a five-unit tick, while prices above that threshold use a ten-unit tick. Under this interpretation, prices between 1,001 and 1,009 are not valid exchange prices; the next legal price after 1,000 is 1,010.
A pricing system may still produce a fair value that falls between legal ticks, so an application needs a rounding rule, such as rounding toward the market or to the nearest permitted tick. The answer also cautions that a quoting engine should retain the difference between its internal valuation and the rounded quote. Quote selection can depend on order-book conditions and changing information, and frequent quote modifications may incur charges. The example illustrates the concept, but the table is user-created from an exchange specification; implementations should follow the applicable venue’s actual rules and define rounding behavior explicitly.
Key ideas
- Tick bands can leave intermediate prices invalid under the exchange specification.
- In the example, the next legal price after 1,000 is 1,010.
- A pricing system needs an explicit rule to map fair values between legal ticks to valid prices.
- The distance between fair value and the rounded quote can inform quoting decisions.
- Order-book conditions and quote-modification charges may matter when updating quotes.
Tags
Full text
# round price to tick size # round price to tick size I have an issue about rounding price to tick size. Suppose there is price tick table below. what is tick size for price 1001, 1002 ... 1004? In other words, how to handle the price in between upper range of first level and the lower range of next level? ``` range tick 0 - 50 1 51 - 1000 5 1005 - 1000000 10 ``` EDIT: The tick table is created by myself which is based on the exchange spec. ``` 50 or less: 1 Over 50 up to 1,000: 5 Over 1,000: 10 ``` ## Answer by chrisaycock (score 1, accepted) https://quant.stackexchange.com/a/4795 That exchange spec implies that there isn't a legal price of 1001, 1002, ..., 1009. The next available price after 1000 is just 1010. If your pricing engine determines a fair value of, say, 1005, then your application will need to apply some rounding logic. For example, you can always round away from the inside price, or you can simply round to the nearest tick in either direction. ## Answer by Matt Wolf (score 0) https://quant.stackexchange.com/a/4798 As long as you adhere to the exchange specs you will be good. But keep in mind that while the rounded price is good to place your quotes in the market, its vital you use the information of how far away your valuation price is from the rounded/quoted price. This is why you see most quoting engines, especially in the listed options market, flip back and forth between two price levels at one frequency, and another at other times. They do it as a function of how far away their valuation price is from the rounded price and especially as a function of other order book intrinsics, such as volumes posted, trades done by others.... What I am trying to say is that one rounding logic is just that, there are different ways to determine your quoted price you shoot into the market. Keep in mind that you most likely will be subject to certain modify/cancel charges, different tiers apply for different types of market participants and also how often you modify/cancel. So, rounding is one thing, whether you strictly consider the rounded price as the price you want to quote an entirely different, your valuation model and rounding algorithm may change the rounded price a multiple of times in a very short period of time when there are new information coming in at high frequency.
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