Tick Size and Its Effect on Spreads

The one-cent minimum quoting increment sets a floor under the spread of many liquid stocks, whether or not a cent reflects fair value.

Tick size is the smallest increment at which an order can be priced, and in United States equities that minimum is generally one cent under Regulation NMS Rule 612, often called the sub-penny rule. This single constraint sets a floor under the spread of any stock priced above one dollar, regardless of how tight the true, continuous fair value spread actually is.

Rule 612 prohibits quoting most stocks priced at one dollar or more in increments smaller than a cent. A stock priced under one dollar can be quoted in smaller increments, generally down to a tenth of a cent, because the rule's cent floor was designed around typical share prices rather than penny stocks.

The rule's cent floor was set in 2005 as part of the broader Regulation NMS package, alongside the order protection rule and the access rule, and it has not been revisited for ordinary-priced equities since, even as trading technology and typical spreads have changed substantially in the intervening years.

The effect is mechanical and immediate. If the true equilibrium spread for a liquid, heavily traded name would be half a cent in a world without a minimum tick, the exchange cannot display that. The narrowest legal spread becomes one cent, wider than fundamentals alone would produce.

For a heavily traded, high-priced name, one cent can represent a tiny fraction of the share price, and the quoted spread is frequently exactly one tick because so many participants want to be at the best price. For a lower-priced or more volatile name, the natural spread may already be several cents wide even without the tick constraint, so the minimum increment has less practical effect.