NSE Lowers Tick Size to Boost Market Efficiency and Attract Retail Investors

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NSE Lowers Tick Size to Boost Market Efficiency and Attract Retail Investors
Credit: © Reuters.

In a move aimed at enhancing price discovery and market efficiency, the National Stock Exchange (NSE) has announced a reduction in the tick size for securities in the cash and stock futures segments. This change is expected to make trading more attractive, particularly benefiting retail investors and traders.

On Friday, the NSE announced, the tick size—the minimum price movement allowed for stock prices—will be reduced to 1 paisa for securities priced below INR 250 in the cash segment, down from the current 5 paisa. This adjustment follows a similar initiative by the Bombay Stock Exchange (BSE) last year, which reduced the tick size to 1 paisa for stocks priced below INR 100 in the cash segment. It will be interesting to see if this move helps NSE strengthen its already dominant position in the cash segment, where it holds a 93% market share.

Currently, the average daily turnover on the NSE in the cash segment stands at INR 1.06 lakh crore, significantly higher than BSE's INR 7,638 crore.

In the stock futures segment, the tick size will now match that of the underlying security in the cash market, while the tick size for stock options will remain unchanged.

"The lower tick size will lead to tighter bid-ask spreads, which enhances price discovery and market efficiency. This will boost liquidity, making trading more attractive and beneficial for retail investors and traders," commented a broking official.

This adjustment allows investors to develop new strategies to take advantage of smaller tick sizes, especially in lower-priced securities. However, it also means an increased load on trading systems as more orders are placed.

For example, if a stock is priced at INR 200.05, the next available purchase price would be INR 200.06 with a 1 paisa tick size, compared to INR 200.10 if the tick size were 5 paisa.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, noted, "While a lower tick size will reduce spreads and potentially boost trading volumes, it won't be an overnight game-changer."

The tick size determined for securities in the T+1 settlement cycle will also apply to the T+0 settlement cycle. All price-related computations, including closing price, base price, common equilibrium price, and settlement price, will align with the applicable tick size of the security.

The current price band mechanism for securities will continue to apply, with prices aligned according to the new tick size. The exchange will review the tick size of each security monthly, using the closing price on the last trading day of the month to determine the tick size for the following month.

This proactive measure by the NSE is expected to enhance trading conditions and further support the participation of retail investors, contributing to a more efficient and dynamic market.

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    Only to enable Jade like big ones to kill the Retailers in the market. NSE should think more towards Retailers protection and control freak trades by big ones.
    Like 2

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