The smallest amount a quoted price is allowed to change on a given instrument, which sets the floor on how tight the spread can ever be.
The tick size is a structural cost. If the minimum increment is one cent, the tightest possible spread on a lit book is one cent, no matter how much competition there is.
It also drives behaviour. A wide tick relative to price makes queue-position extremely valuable, because you cannot outbid a resting order by a fraction — you must jump a whole tick or get in line. A narrow tick makes queueing cheap to jump and shifts the game toward speed.
Example: a $12 stock with a one-cent tick has a minimum spread of 8.3 basis points. A $600 stock with the same one-cent tick has a minimum spread of 0.17 basis points. The cheap stock is structurally far more expensive to round-trip.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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