A closer look at the UK tick size

If you're wondering what a 'tick size' is, here is a quick explainer:

A tick size is the smallest increment by which the price of a stock can change. Think of it as the 'ruler' for price changes. For example, if a stock is trading at 450.5 GBp (that's £4.505), and the tick size is 0.5p, the next higher price you can quote is 451.0 GBp. You can’t shave economically insignificant fractions off the price to jump the queue of orders.

UK Tick sizes were standardised under MiFID II, following what insiders dubbed the 'tick size wars' (note 1) (a time when trading venues competed by reducing tick sizes to gain market share by offering lower trading costs, but at the expense of meaningful price updates). The idea behind a harmonised regime was simple: set a floor for price movements so that quotes remain meaningful.

In the UK regime, tick sizes depend on two things:

• Price of the stock, which changes continuously throughout the trading day.
• Liquidity, measured by Average Daily Number of Transactions (ADNT), which is reassessed annually (note 2).

Figure 1 shows the UK tick size regime grid. Each row corresponds to a price band, and each column to a liquidity band (based on ADNT). Since prices update continuously but ADNT is assessed annually, a stock can move up or down the tick size grid intra-day as its price fluctuates; but can only move right or left — into a new liquidity band — once a year (in April).

In Figure 1 we overlay a heatmap showing the most frequently observed tick sizes for FTSE 350 stocks in March and April 2024 (note 3). Among FTSE 350 stocks, the most common tick size is … (indeed) half a penny.

The tick size superpower 

Tick sizes might sound niche, but they play a key role in supporting efficient, orderly markets. Well-calibrated tick sizes help tighten bid-ask spreads, promote fair competition among traders and venues, and encourage price formation that reflects true supply and demand. In short, they help make markets more liquid, more stable, and more attractive for investors; both domestic and international.

This also matters for the UK’s competitiveness as a global financial centre. Liquid, competitive markets are a core component in attracting capital and stimulating long-term growth. A healthy trading environment that supports fair and transparent price discovery is not only good for day-to-day trading — but it also underpins long-term investment, risk management and dynamism in the economy.

Tick sizes sit at the heart of price formation and market functioning. But they can sometimes restrict prices - known as a stock being tick constrained. 

A stock is considered tick constrained when the bid-ask spread is only one tick wide. In that situation, anyone trying to improve the quote effectively crosses the spread, which ultimately leads to trade execution. That sounds efficient, but it also means there's no room for further price improvement and for participants to meet halfway. In such cases prices become too coarse, spreads are wider than necessary, and trading costs can increase.

At the other end of the spectrum, a stock can have too many ticks in its spread. The spread is several ticks wide and traders can post marginally better prices without triggering trades. If these small quote improvements don’t represent a meaningful price improvement, this can lead to dispersed quotes at different levels of the order book, and a race to the top of the book based solely on the speed at which market participants can place orders. This may disadvantage those who want to execute larger trades or whose quotes fall down the book.

This trade-off demonstrates the need for a balance.

So, what’s the ideal balance?

Tick sizes should be wide enough to make quotes informative but narrow enough to avoid inflated transaction costs and inefficient price formation. And that's precisely where the tick size regime comes in.

Ideally, a well-designed regime should aim to anticipate the stock’s spread and assign a tick size that encourages this balance — neither too tight, nor too loose. Price and liquidity are good predictors of such spread.

When looking at UK stocks, we find that larger market cap and more liquid stocks tend to be more tick constrained. In fact, 64% of the FTSE 100 stocks had less than 2 ticks intra spread and 11% have less than 1.5 ticks intra spread on average in April 2024. In contrast, among FTSE 250 stocks, being tick constrained is unusual and the opposite case is more common: 17% of FTSE 250 stocks had more than 5 ticks intra spread (see Figures 2.1 and 2.2).

But is having 5 ticks in the spread too many? Well, it depends. While there’s no one-size-fits-all rule, research suggests that a range of 1.5 to 5 ticks per spread is optimal (notes 4 and 5). Still, in practice, what's 'optimal' likely varies depending on the specific characteristics of UK stocks. 

A different measure is how long a stock spends with only 1 tick in the spread. As shown in Figure 3.2, in April 2024 14% of FTSE 100 stocks spent on average at least half their trading hours tick constrained. For most of these stocks (85%), the average number of ticks in the spread is less than 1.5 over the month. This indicates that for a sizeable portion of the index, the tick is constraining.

In contrast, 9% of FTSE 250 stocks spent on average less than 1% of trading day being tick constrained, and for most these stocks the average number of ticks intra spread is over 5. For these stocks, the tick size is practically never binding. 

How effective is the UK tick regime and maintaining this balance?

Each year, stocks are assigned to columns in the regime’s grid based on their liquidity, but how effective is this reclassification process?

Ideally, annual reclassifications should help nudge stocks into an optimal zone of 1.5 to 5 ticks per spread. In 2024, the regime worked effectively for most stocks (74%, corresponding to the coral shaded cells in Figure 4). This means that the majority of stocks did not get reclassified when they were already in an optimal range of ticks intra-spread or were appropriately reclassified when they were outside of this optimal range. That’s promising.

However, some stocks saw tick size changes when they were already in an optimal range, and others didn’t see a change when it could have been beneficial. For example, only 38% (24 out of 60) of stocks that had too many ticks in the spread saw an increase in their tick size (see Figure 4).

Figure 4 also shows that tick size changes directly impact the number of ticks within the spread. Out of the 24 stocks that had too many ticks intra spread in March 2024 and were reclassified, 22 moved into the optimal band in April 2024, after their tick size was adjusted. It’s important to note that not all changes in the number of ticks intra-spread can be attributed to changes to the tick size — some stocks’ spreads changed even when a stock had not had their tick size changed, affecting the number of ticks within them. However, the regime’s adjustments appear to help maintain balance in many cases.

Figure 4: Tick size changes in 2024

Ticks intra spread prior to change (March 2024):

Ticks intra spread after change (April 2024):

To test how much tick sizes matter, we took advantage of the annual reclassification in April 2024, when 68 stocks received a larger tick size (note 6). This provided a setting for using a difference-in-difference (DiD) approach to compare these stocks against others that saw no change, while controlling for differences in stock characteristics (note 7).

We found clear, causal evidence that tick size increases affect market quality through several channels (note 8):

• Spreads widened: as expected, increasing trading costs.
• Undercutting behaviour discouraged: the cancel-to-trade ratio fell, signalling less frequent quote updates to jump ahead of the queue.
• Depth improved: with fewer price levels available, volume concentrated at the top two levels of the order book.
• No impact on queuing: average time for orders to execute seemed unaffected.

Detailed results for some key indicators are shown in Figure 5.

We analysed the impact on many other indicators. We didn’t observe any significant drop in total traded volume, suggesting that traders didn’t migrate to other venues or off-book execution as a result of a tick size change. However, we did see a shift in strategies: fewer orders, but of larger size - consistent with participants adapting to wider price increments.

So yes, tick sizes have a significant impact. They influence how market participants behave and how trading costs evolve. The trade-off is clear: larger ticks mean higher trading costs, but also more stable prices and deeper orderbooks.

Figure 5: Average Treatment Effect on Treated (ATT) Estimates for key indicators

Figure 6 shows the impact of the tick size change on treated stocks, aggregated to a weekly level. While the treatment effects were originally estimated daily, we grouped them by week to smooth out the day-to-day noise that’s typical in market quality indicators. This weekly view makes it easier to observe clearer trends — including a noticeable shift in three indicators following the tick size increase. 

Limitations: The causal analysis might suffer from selection bias. In addition, there could be heterogenous effects that we do not analyse.

Tick sizes play a quiet but powerful role in shaping UK equity markets. In this article, we’ve shown how they are determined and the impact they have on trading — from spreads and depth to behaviour at the best bid and offer. Our findings suggest the current regime is broadly effective, a view echoed by some market participants. As with any regulatory framework, there are trade-offs — and while no one-size-fits-all rule exists, the current regime provides a strong foundation.

This research comes from the FCA’s Economics team, and we’re keen to hear your views. Does the current tick size framework support fair and efficient trading in your view? Are there areas where it could do more? Have you conducted your own analysis?

If you have thoughts, data, or feedback - we’re listening. Get in contact us at [email protected].