NSE lowers tick size to one paisa: What does it mean to you and markets?

India's leading bourse, the National Stock Exchange (NSE) has announced to introduce one paisa tick size for all stocks below Rs 250. According to the market participants, the move is aimed to improve liquidity in the small ticket priced counters and improve fair price discovery in them.
 

Exchange has informed about revision in tick size of securities price below Rs 250 in Capital Market Segment (CM Segment) of NSE, said NSE stated in a circular on Friday, May 24. The stock futures shall have the same tick size as applicable for underlying security in CM Segment, it said further.
 

All securities - except ETFs - under EQ, BE, BZ, BO, RL and AF series will see their tick sizes change from the earlier tick of five paise, according to the NSE circular. The tick size for securities in T+1 settlement will also be applicable for T+0 settlement (series T0), the NSE circular added.
 

Theoretically it should lower the impact cost for investors while buying and selling in small ticket stocks, said Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers. "However, it is just one side of the coin and the other being the free float itself of the respective companies," he added.
 

The exchange said it will reduce the tick size to one paisa for securities priced below Rs 250 in the cash segment from 5 paisa currently. A tick size is the minimum price movement by which stock prices can change during the session. This follows a similar move by BSE last year where it had reduced the tick size to 1 paisa for stocks below Rs 100 in the cash segment.
 

The NSE announced that tick sizes will be reviewed and adjusted monthly, based on the closing price on the last trading day of the month. The exchange will use this closing price in the CM Segment to determine the tick size for the following month. The revised tick size in the CM Segment will also apply to the corresponding stock futures.
 

The reduction in tick size to 1 paisa is anticipated to enhance market liquidity by narrowing the bid-ask spread, thereby reducing transaction costs. This increased precision in pricing will contribute to better price discovery, making the market more attractive for investors and traders alike, said Anshul Jain, Head of Research, Lakshmishree Investments and Securities.
 

"This strategic move is set to benefit day traders, high-frequency traders, market makers, and brokers, who rely on minimal spreads and high liquidity for their trading strategies. By fostering a more precise and liquid market environment, the NSE continues to strengthen its position as a leading exchange in the global financial landscape," he said.
 

The new tick size rule on the NSE will be applicable from July 08, 2024 onwards, based on the closing price of June 2024. In case of a corporate action such as bonus, stock split, dividend or rights issue, the existing tick size will continue for the stock. More than 1,350 stocks out of 2,750 stocks listed on NSE, fall in the threshold of below Rs 250 mark.
 

The NSE's circular added that starting July 8, the tick size for stock futures will match that of the cash market segment. Any revisions in tick size will apply to all expiry periods, including near-month, middle-month, and far-month contracts.
 

This adjustment aims to bolster price discovery and market efficiency, rendering trading more appealing for both retail investors and traders, said Arvinder Singh Nanda, Senior Vice President, of Master Capital Services. The tick size in the stock futures segment will align with that of the underlying security in the cash market, he said.
 

"This alteration will empower investors to devise novel strategies tailored to the smaller tick sizes, particularly for lower-priced securities," he added. "NSE's decision to reduce the tick size for stocks below ₹250 is anticipated to enhance liquidity, foster better price discovery, and encourage innovative trading strategies. however, it may also escalate system load amid more orders."