Learn about tick size and lot size effects — Hinglish notes

6.3.6 · Stock-Market › Market Microstructure

WHAT are we talking about?

WHY do these exist?

Bina tick ke, traders ek doosre ko fractions of a cent se hamesha undercut karte rehte ("penny-jumping" to infinity) — order book chaotic ho jaata aur quotes meaningless ho jaate.
Bina lot ke, exchange systems dust-sized orders mein dub jaate. Lots contracts ko standardize karte hain (derivatives mein crucial) taaki har participant ko notional per unit pata ho.

Tick size — deriving the effects from first principles

HOW does tick size set a floor on the spread?

Bid-ask spread best buy price (bid) aur best sell price (ask) ke beech ka gap hai. Ek market maker yeh spread liquidity provide karne ke compensation ke roop mein earn karta hai.

Spread ticks ki ek whole number honi chahiye: $Spread = n \cdot τ$ jahan $n \geq 1$ , $τ =$ tick.
Isliye minimum possible spread exactly ek tick hai: $Spread_{m i n} = τ$

Yeh step kyun? Kyunki bid aur ask dono grid par hone chahiye aur ask > bid, toh woh ek doosre ke sabse paas sirf ek rung door ho sakte hain.

Yeh kyun matter karta hai: Low-priced stocks tick-constrained hoti hain — unka spread ek bhari percentage se neeche nahi ja sakta. High-priced stocks tick ko almost feel hi nahi karti.

The tick-size trade-off (steel-manned both ways)

Smaller tick	Larger tick
Tighter spreads → cross karna sasta	Wider minimum spread → cross karna mehnga
Best price par depth kam (queue kai rungs mein split ho jaati hai)	Har price par deep queue, stable book
HFT penny-jumping ko encourage karta hai	Patient limit orders ko reward karta hai

Figure — Learn about tick size and lot size effects

Lot size — deriving the effects

HOW does lot size force a minimum trade value?

$V_{m i n} = L \cdot P$

jahan $L =$ lot size, $P =$ price. Kyun? Sabse chhota order ek lot hota hai, jo ek lot × price ke barabar hota hai.

Rounding / odd-lot effect: agar aap upar wale stock ka $\$ 50{,}000 $c hah t e hain, t o haa p z y a d a sez y a d a$ \lfloor 50000/3000 \rfloor = 16 $s ha r esr ak h s ak t e hain — l e k in$ L=100$ ke saath aap ek lot bhi nahi khareed sakte. Lot size allocation ko granularize karti hai aur odd-lot residuals create karti hai.

Worked examples

Common mistakes

Active recall

Recall Quick self-test (predict before revealing — Forecast-then-Verify)

Tick ke terms mein minimum spread? → $τ$
Relative spread formula? → $τ / P$
Lot size se minimum trade value? → $L \cdot P$
Chhote tick ke do opposing effects? → tighter spread ✅ lekin thinner depth / queue-jumping ❌
Splits liquidity kyun badhate hain? → woh $V_{m i n} = L \cdot P$ cut karte hain, participation wide karte hain.

Recall Feynman: explain to a 12-year-old

Socho ek shop hai jo sirf 12 ke boxes mein eggs bechti hai (yeh lot size hai) aur sirf 10-cent coins mein payment accept karti hai (yeh tick size hai). Aap 5 eggs nahi khareed sakte, aur aap exactly $1.03 pay nahi kar sakte. Agar coins chhote hote (1-cent), toh aap fairer price pay kar sakte — lekin cashier ko hamesha count karna padta aur till par chaos ho jaata. Agar box chhoti hoti (3 eggs), toh zyada bacche ek box afford kar sakte. Stock market mein prices aur quantities ek grid par rehti hain bilkul isi tarah, aur squares ka size change karta hai ki kaun khel sakta hai aur kitna sasta hai.

Flashcards

Same $0.01 t i c k :$ 5 ya $250 k a s t oc k t r a d e k a r na s a s t ahai ? :::$ 250 wala stock — uska relative spread (0.004%) $5 wale stock ke (0.20%) se kahin chhota hai.

Tick size kya hai?

Do quotable prices ke beech sabse chhota permissible price increment.

Lot size kya hai?

Sabse chhoti tradable quantity (ya woh multiple jisme orders hone chahiye).

Tick τ ke terms mein minimum possible bid-ask spread?

Ek tick, yaani Spread_min = τ.

Relative (proportional) spread ka formula?

s = τ / P (tick divided by price).

Low-priced stocks ko "tick-constrained" kyun kaha jaata hai?

Unka τ/P bada hota hai, isliye spread ek badi percentage se neeche nahi ja sakta.

Lot size L aur price P se implied minimum trade value?

V_min = L · P.

Tick size chhoti karne ka ek downside batao.

Har price level par thinner depth aur limit orders ki aasaan queue-jumping/penny-jumping.

Stock splits kyun liquidity badhate hain?

Woh price P kam karte hain, isliye V_min = L·P gir jaata hai, aur zyada (chhote) investors participate kar sakte hain.

Derivatives mein contract notional formula?

Notional = L · P · m (lot × price × multiplier).

Connections

Bid-Ask Spread
Market Liquidity and Depth
Limit Order Book
Stock Splits
High-Frequency Trading
Order Types and Queue Priority
Derivatives Contract Specifications