Tick size is the minimum increment a price can move — for most liquid US stocks, one cent ($0.01). It sounds like a triviality, but it quietly shapes the spread, the liquidity, and how easy an instrument is to trade cleanly.
How it shapes spreads
Tick size sets the floor for the spread. If the minimum increment is a penny, the tightest possible spread is one penny — and for highly liquid names like SPY, spreads sit right at that floor because so many participants compete to quote. A larger tick forces wider minimum spreads; a smaller tick allows tighter ones but can fragment liquidity across more price levels.
The liquidity trade-off
There's tension. Finer ticks let prices be more precise and spreads tighter — good for takers. But too-fine ticks can thin out the size resting at each price level and reduce the incentive for market makers to post, which can hurt displayed liquidity. Regulators have run pilots (like the tick-size pilot) precisely to study this balance. The right tick is a compromise between precision and depth.
Tick size is the grid the whole market trades on — fine enough to be precise, coarse enough to keep depth at each price.
Why it matters to you
For options especially, tick size and the resulting spread directly affect your execution cost. Trading penny-wide, deeply liquid instruments (like SPY options) means the tick-and-spread structure works in your favor; thin, wide-tick contracts cost you more per trade. It's one more reason a systematic approach favors the most liquid instrument available — the plumbing is simply friendlier.