The National Stock Exchange (NSE) has lowered the tick size for securities in the cash and stock futures segments, a move which is expected to enhance price discovery and market efficiency and make trading more attractive, benefitting retail investors and traders alike.
On Friday, NSE said it will reduce the tick size -- the minimum price movement by which stock prices can change -- to 1 paisa for securities priced below ₹250 in the cash segment from 5 paisa currently.
This follows a similar move by BSE last year where it had reduced the tick size to 1 paisa for stocks below ₹100 in the cash segment. It remains to be seen if the lower tick size will help NSE further cement its dominance in the cash segment where it enjoys a 93 per cent share.
The average daily turnover on the NSE in the cash segment for April stood at ₹1.06 lakh crore against ₹7,638 crore at BSE.
The stock futures segment will have the same tick size as that for the underlying security in the cash market. There will be no change in the tick size for stock options.
“The lower tick size will lead to tighter bid-ask spreads, which will enhance price discovery and market efficiency. It will increase liquidity, making trading more attractive and benefitting retail investors and traders,” said a broking official.
Investors can now develop new strategies to exploit the smaller tick sizes, especially in lower priced securities, added the official. On the flip side, the load on the systems will increase as more orders get pumped in, he said.
So, if a scrip is quoting at ₹200.05, the the next available price at which the investor can buy the security is ₹200.06, if the tick size is 1 paisa. Had the tick size been 5 paise, the next available price would be ₹200.10.
“Lower tick size will reduce the spread and help prop up volumes to some extent. But it will not be a game-changer, overnight,” said Kranthi Bathini, Director - Equity Strategy, WealthMills Securities.
The tick size determined for securities in the T+1 settlement will apply for the T+0 settlement as well. All price-related computations such as closing price, base price, common equilibrium price and settlement price will be aligned as per the applicable tick size of the security, according to NSE.
The price band mechanism for the security will continue to apply as per the current method and the price determined as per the band will be aligned as per tick size of the security.
The exchange will review the tick size of a security every month. The closing price on the last trading day of the month in the cash segment will be used to determine the tick size, which will be made applicable for the next month.
In March, NSE had cut the transaction charges on trades in both cash and derivatives segments by 1 per cent. Last month it reduced the market lot size of derivative contracts on select indices, including Nifty 50.