In a move echoing the Bombay Stock Exchange’s (BSE) decision last year, the National Stock Exchange of India (NSE) has announced a significant reduction in the tick size for stocks trading below ₹250.
This change, effective from June 10 for the cash segment and July 8 for stock futures, narrows the minimum price movement allowed for these securities from 5 paise to 1 paisa. While BSE’s 2023 move applied to stocks under ₹100, NSE’s decision covers a broader range, potentially impacting over 1,300 listed securities.
This move will benefit traders and investors and also increase market efficiency and liquidity.
What is Tick Size?
In simple terms, it is the minimum price movement allowed for a security. In India, tick sizes were traditionally larger, often leading to wider bid-ask spreads and potentially hindering price discovery. By reducing the tick size, NSE is essentially narrowing the gap between the buying and selling prices, making it easier for trades to execute.
A smaller tick size encourages more active trading as it reduces the cost of entering and exiting positions, boosting liquidity, and making it easier for traders to buy or sell securities without significantly impacting prices.
With narrower spreads, prices are likely to reflect the true market value of securities more accurately. This improved price discovery can lead to fairer valuations and more efficient allocation of capital.
Slippage, the difference between the expected price of a trade and the actual price at which it is executed, is a common concern for traders. A smaller tick size can minimize slippage, as it allows for more precise price adjustments. Retail traders, who often trade in smaller quantities, stand to gain significantly from this change.
Furthermore, NSE’s move aligns with global trends towards electronic trading and algorithmic strategies, which thrive in environments with smaller tick sizes and faster execution speeds.
Despite the advantages, there is also a worry that smaller tick sizes could lead to increased price volatility, especially in less liquid securities. This could pose risks for traders who are not prepared for rapid price fluctuations.
The transition to a smaller tick size requires robust technological infrastructure to handle increased trading volumes and faster execution speeds. Exchanges and brokers need to invest in upgrading their systems to ensure smooth operations.
Additionally, regulators need to closely monitor market activity to prevent any potential manipulation or unfair practices that could arise in a more fragmented market with smaller price increments.
Moreover, traders need to be educated about the implications of a reduced tick size and how to adapt their strategies accordingly. This includes understanding the risks of increased volatility and the importance of risk management. Despite the challenges, the overall outlook for traders is positive. Traders who embrace technology, develop sophisticated strategies, and prioritize risk management are likely to thrive in this new environment.
For retail traders, the reduced costs and improved liquidity open doors to markets that were previously out of reach.
Way forward
NSE’s decision to reduce the tick size is a bold step towards modernizing India’s financial markets.
By fostering greater liquidity, enhancing price discovery, and reducing trading costs, this move can democratize access to markets and promote a more vibrant and efficient trading ecosystem.
As with any significant change, success will depend on collaboration and adaptation. Exchanges, brokers, regulators, and traders need to work together to address the challenges, seize the opportunities, and ensure that this landmark decision translates into tangible benefits for all stakeholders.
The writer is the Head of India at Sernova Financial