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Price Discreteness and Tick Size in Stock Markets

Article Quant Q&A · Author: XY0
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Summary

Price discreteness means stock prices can move only in specified increments, or ticks, rather than taking any value on a continuous scale. The note illustrates this with historical NYSE quotes that used fractional increments before decimal pricing, then switched to much finer decimal increments. A smaller tick makes quoted prices less discrete by allowing more possible price levels within the same range.

The concept matters in market microstructure because tick constraints can affect trading frictions and observed price behavior, including ex-dividend price changes. The document gives a definition and an illustrative comparison, but no empirical results or detailed account of how tick size interacts with spreads, liquidity, or trading costs. Its example describes a historical change in quote increments and should not be read as a current specification for all markets or securities.

Key ideas

  • Price discreteness is the restriction of quotes to a set of permitted price increments.
  • Smaller tick sizes allow prices to take more values and appear more continuous.
  • Tick size is one market friction considered in explanations of ex-dividend price behavior.
  • The example describes NYSE decimalization as a historical move from fractional to finer increments.

Tags

EquitiesMarket microstructure
Full text
# price discreteness in stock market


# price discreteness in stock market












can you explain what is meant by 'price discreteness' in stock markets? I happened to read this term in some papers but I don't know how to define it

In the paper "Do Price Discreteness and Transactions Costs Affect Stock Returns? Comparing Ex-Dividend Pricing before and after Decimalization" https://www.jstor.org/stable/3648205 the authors state that " several microstructure theories argue that taxes are not the key factor affecting ex-day price behavior and that the price drop (relative to the dividend paid) can be explained by market frictions such as price discreteness and bid-ask spreads. What is exactly price discreteness?

## Answer by KaiSqDist (score 2, accepted)

https://quant.stackexchange.com/a/77420

The first sentence in the abstract explains it. "By the end of January 2001, all NYSE stocks had converted their price quotations from 1/8s and 1/16s to decimals". The prices are becoming less discrete and more continuous. For example, if an original price range was like 9.000, 9.125, 9.250 ... 10.000 and then it became 9.001, 9.002, 9.003 ... 10.000, it is becoming less discrete and more continuous.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.