Why Tick Size, Lot Size and Pips Shape Your Trading Costs

A market where 0.0001 is a big deal

Picture a currency exchange counter at an airport. The board shows one price for buying euros and another for selling them. The gap between those two numbers is the shop's income, and it exists because someone has to stand behind the counter.

Electronic markets work the same way, just faster. A forex quote almost always shows two prices: the bid, which is what a buyer will pay you, and the ask, which is what a seller wants from you. The difference is the spread — the cost of entering and leaving a trade. On a screen it looks like a rounding error. Over hundreds of trades, it is not.

How small can that spread get? That depends on the tick size: the minimum increment by which a price is allowed to move. Tick size is the fine print of a market's rulebook, and it turns out to matter a great deal.

Meet the pip, the tick's cousin in forex

In foreign exchange, prices are quoted in pips. A pip — short for "percentage in point" or "price interest point" — is the standard unit for measuring a price move. For most pairs it's the fourth decimal place, so a move in EUR/USD from 1.1700 to 1.1701 is one pip. Japanese yen pairs are the exception: the yen is worth less per unit, so USD/JPY is quoted to two decimals and a pip sits at the second place.

Many platforms now show an extra digit, the pipette or fractional pip, worth one-tenth of a pip. If EUR/USD ticks from 1.17000 to 1.17005, that's five pipettes. Most people ignore them. Automated systems do not — they live there.

Here's a small example. If EUR/USD moves from 1.1700 to 1.1750, that's 50 pips. On a mini lot — 10,000 units of currency — you'd multiply 50 pips by roughly $1 per pip. On a standard lot of 100,000 units, the same 50-pip move is about $500. Same movement, very different arithmetic, because the lot size — the standardised quantity you're actually trading — changed.

Lots: buying currency by the crate

You don't buy currencies one unit at a time, any more than a restaurant buys eggs one at a time. Forex trades in packaged sizes called lots: a standard lot is 100,000 units, a mini lot 10,000, a micro lot 1,000, and a nano lot 100. Your lot size decides what each pip is worth to you in money.

That link between pips and lots is why a single pip of spread is trivial on a micro lot and meaningful on a standard one. It is also why the same market can feel cheap to one participant and expensive to another.

When a finer price grid changed a major market

It's one thing to theorise about tick sizes. It's another to watch a market halve one. That's what happened in the U.S. Treasury market.

Treasury securities still trade in fractions rather than decimals — prices are quoted in 32nds of a point, with those 32nds sometimes split further. On the BrokerTec platform, the 2-year note traded in increments of a quarter of a 32nd. Then, effective 19 November 2018, BrokerTec halved that tick to an eighth of a 32nd — the platform's first tick change since it began in 2000. Eight weeks later, in January 2019, the 2-year Treasury futures contract made the same move. Other securities kept their old tick sizes, which gave researchers a natural comparison group.

A Federal Reserve Bank of New York study of that episode found the finer price grid narrowed the inside bid-ask spread. For the smallest trades of around $1 million, the spread narrowed by roughly 50%, from an average just above the old tick to an average just above the new one. Larger trades of $50 million or more showed a similar improvement. Trading activity rose. Pricing errors fell, suggesting prices tracked underlying value more precisely. And the cash Treasury market briefly accounted for a larger share of price discovery than futures — until futures made the same tick change, at which point much of that shift reversed.

One honest caveat: depth near the top of the order book did decline when measured at a fixed number of price levels, but that comparison flatters the old regime because there were simply more levels in the new grid. Measured at a constant economic distance instead, the change in depth was modest, and the price impact of trades didn't shift meaningfully. A smaller tick didn't damage liquidity provision.

Why the plumbing speaks in tags

For all the differences between asset classes, a lot of electronic trading runs on one shared language: the FIX Protocol, a global open standard that has evolved for more than three decades. FIX defines what trading information means — the structure and workflows of orders, executions and market data — without dictating how that information physically travels. Messages are sequences of tag-value pairs, where a numeric tag carries a specific meaning: a message type, an instrument symbol, a side, a quantity, a price, a checksum.

This is where quoting conventions stop being trivia. When your system sends an order with a quantity and a price, those fields have a defined meaning on both ends. A cleaner common language means fewer bespoke connections, lower cost and less operational risk. It also means that a price field quoted to five decimal places, or a quantity expressed in lots, travels intact from your screen to the venue.

The market around the tick

Forex itself is the largest financial market by trading volume, with average daily turnover of roughly $7.5 trillion according to the BIS Triennial Survey. It is largely over-the-counter, meaning trading happens directly between parties rather than on a single central exchange — and it operates under notably lighter regulatory oversight than equity and bond markets in most countries. Spot volume has roughly quadrupled over two decades to over $2 trillion a day by 2022, with most growth in dealer-to-customer trading, while inter-dealer activity has declined as a share.

Yet the main inter-dealer electronic brokers, though a small slice of overall volume, are still viewed as the main locus of price discovery. Trading is increasingly fragmented across venues, algorithmic execution is prominent, and non-bank intermediaries such as principal trading firms have strengthened their positions. As one BIS report puts it, greater electronification has commoditised large quantities of high-frequency data. All of this sits on top of the same basic question: how finely can a price move, and who pays for the gap?

A tick size is a small number with an outsized personality. It decides whether a market can express a tiny improvement in price or must round it away, and that in turn shapes spreads, depth, execution and the economics of quoting at all.

What this means if you're participating

None of this tells you what to buy or sell. It does mean a few things are worth checking on your own platform, because conventions vary by venue, broker and jurisdiction, and you should confirm the specifics where you actually trade.

First, know which price you're getting. You buy at the ask and sell at the bid, so a position starts slightly behind the moment it opens. Second, know your pip and lot values. A yen pair quoted to two decimals will punish anyone calculating in four. Third, know that spreads behave differently across pairs and across the clock — tighter when liquidity is deepest, wider around major news and off-hours. Fourth, if you're building or testing systems, be precise about how your price and quantity fields are specified, because a tick is meaningless if the receiving end interprets it differently.

Tick size, lot size and pips sound like the boring end of finance. They are also where the money quietly moves between participants — every second, in every market, in fractions of fractions that most people never look at.