Tick size and minimum order size
Your order was rejected for an invalid price, and the price looked perfectly reasonable. Or it was accepted with a quantity slightly different from the one you typed.
A venue does not accept arbitrary numbers. Prices move in fixed increments, quantities move in fixed increments, and both have minimums. Those constraints are the least glamorous part of microstructure and they explain a large share of rejected orders.
The four constraints
Tick size is the smallest permitted price increment. If the tick is 0.5, then 40,000.0 and 40,000.5 are valid prices and 40,000.2 is not. Every price level in the book sits on a tick, and the number of levels between two prices is fixed by it.
Lot size, or step size, is the smallest permitted quantity increment. If the step is 0.001, an order for 1.0005 units is not expressible.
Minimum order size is the smallest quantity the venue will accept at all, which is not the same as the step. A venue can have a step of 0.001 and a minimum of 0.01, so 0.005 is a legal multiple and still too small.
Minimum notional is a floor on quantity times price rather than on quantity alone. It exists because a fixed quantity floor means very different things at different price levels, and venues generally care about the value of an order, not its unit count.
An order must satisfy all four. Failing any one produces a rejection at validation, before the order reaches the book — so it never rests, never trades, and never appears in any history except as a rejection.
Why tick size exists
It would be technically simple to allow any price. Venues do not, and the reasons are mechanical.
A tick makes a queue possible. Under price-time priority, the way to get ahead of a resting order is to post one increment better. If increments could be arbitrarily small, anyone could step in front of any order for an arbitrarily small concession, and time priority would be worth nothing — overtaking would always be cheaper than waiting. The tick sets the price of jumping the queue.
A tick concentrates depth. With coarse increments, orders pile up at fewer levels, so each level holds more quantity and a given order consumes fewer levels. With very fine increments, the same total interest spreads across many thinly populated levels.
A tick sets a floor on the spread. The best bid and best ask must be at least one tick apart, or they would cross and trade. So the minimum possible spread on a venue is exactly one tick, and that is a hard lower bound on the cost of crossing twice.
Neither a coarse nor a fine tick is better. A coarse tick makes the spread expensive and makes depth meaningful; a fine tick makes the spread cheap and makes displayed depth easy to fragment. Venues choose, and different venues choose differently for the same asset.
The mechanism
THE MECHANISM — discreteness at the venue
· Price not a multiple of the tick
→ rejected at validation. Never
in the book, never in the tape.
· Quantity not a multiple of the step
→ rejected, or silently rounded
down. Both behaviours exist.
· Quantity above the step but below the
minimum size
→ rejected. A legal multiple is
not automatically a legal order.
· Quantity legal, notional below the
minimum
→ rejected. The floor is on value,
not on units.
· Spread of one tick
→ the tightest the book can be.
A tighter quote is not
expressible.
· Closing a position of an awkward size
→ NO GUARANTEE it is expressible.
A remainder below the minimum
may not be closable as an order.
· Tick and step values, rounding versus
rejecting, and when they change
→ VENUE-SPECIFIC. Values also
change over time on one venue.Worked example
Illustrative figures, synthetic throughout. Suppose a venue with a tick of 0.5, a step of 0.001, a minimum size of 0.002, and a minimum notional of 10.
The best bid is 40,000.0 and the best ask is 40,000.5 — one tick apart, the tightest possible book. You cannot post a bid at 40,000.2 to get in front; the price does not exist. To become the best bid you must go to 40,000.5, which crosses, so improving on the touch is impossible without trading. This is what it means for the spread to be at the tick floor.
Now suppose you want to buy 0.0015 units. Legal as a multiple of 0.001, but below the minimum size of 0.002 — rejected. You try 0.002, which passes the size floor, and the notional is 0.002 × 40,000.5, about 80 — above the minimum notional of 10, so it passes.
Now suppose the price were much lower, say 1,000 in illustrative terms. The same 0.002 units is a notional of 2, below the floor of 10 — rejected, for a reason that has nothing to do with the quantity itself. The same order is valid at one price and invalid at another.
Finally, suppose a fee is deducted in the asset you bought, leaving a position of 0.0019. That is below the minimum size, so an ordinary order cannot close it. What happens to such a remainder — a conversion facility, a special close path, or nothing — is a venue matter, and it is the most common form this constraint takes in practice.
Contract sizes and quantity that is not what it looks like
Derivatives add a layer. A contract may represent some quantity of the underlying rather than one unit of it, so an order for 5 contracts is not an order for 5 units.
Two conventions to be aware of, because they change what the numbers on your screen mean.
Contract multiplier. Each contract represents a fixed quantity of the underlying, and your position size in the underlying is contracts times multiplier. The minimum increment is one contract, which is a coarser floor than a spot step size.
Quantity denominated in the quote currency. Some contracts are sized in the quote currency rather than in the base asset, so a position of a fixed contract count represents a varying quantity of the underlying as the price moves. This is the same distinction that separates linear and inverse contracts, and it is not a detail — the exposure changes with price even though the contract count does not.
The failure mode
Discreteness fails silently in one direction and loudly in the other, and the silent one is worse.
The loud failure is a rejection, which at least tells you something. The silent failure is rounding: a venue that accepts your order after truncating the quantity down to a legal step has given you a position slightly smaller than the one you asked for, and nothing in the confirmation flags that the number changed. Repeated across many orders, the drift is systematic and always in the same direction.
The other quiet consequence is the unclosable remainder. Fees, funding, and partial fills all produce positions that are not multiples of anything convenient, and a venue’s minimums apply to closing orders exactly as they apply to opening ones. Nothing warned you at entry that the exit had a granularity, because at entry the constraint was satisfied.