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As I understand, the share price can only change by a multiple of a fixed "tick size". What I do not understand is how frequently the share price is allowed to change in one second.

Are there any restrictions regarding the number of price changes every second? What are "representative" tick frequencies for commonly traded stock?

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From a technical perspective, it's all to do with how matching (or crossing) works. Many exchanges impose a maximum tick frequency just to have an upper limit on the outgoing data.

The order book and the matching engine are usually two independent, orthogonal concepts. There's a working cycle that, at time T0, takes a state of the order book (a snapshot if you will) and all incoming orders (a snapshot of the order queue) and feeds them to the matching engine.

An order can either result in a cross, in which case something is taken from the book, or when there's no matching cross side an order can be added to the book. Once this cycle is over, the order book (and all executions in that time slot) is disseminated again, and the working cycle can be re-run.

Just a thought experiment now: If they did process each order individually (i.e. start a new round and send the order book afterwards) then I could create a lot of noise by sending an order and its cancellation, or an order and a self-crossing order at the same time (it's called quote stuffing). Everyone could see every single state the order book goes through, in particular they will see my order coming in, only that I'm the only one knowing that this order will be cancelled moments later, and while they decide whether or not to react I can use the time to do something useful, my abusive behaviour has given me a time advantage.

The exact configuration of the time windows above depend on many factors and is often not even disclosed to the public. If you need this number because you're building a trading system and need an upper bound or so, you could check with the exchange's tech or API department.

Edit
Just to clarify, I'm talking about changes in the order book at any level (not necessarily the top level), and since most exchanges for a given price level consolidate all orders (they only show you the total quantity at that price level), they will have to report the new quantity after every round.

Also, I'm using crossing and matching synonymously.

Edit
Not from personal experience, but have a look at Algo's M2 engine (in particular their features), they demonstrate how the cycle in principle looks, but provide no figures how much time is allocated to each step (from Matching Engine Gap Fill to Gap Fill)

  • 1
    A few questions: 1) Is crossing engine synonymous to matching engine? 2) What is a working tact? 3) Is the full order book really disseminated at every tick? I was under the impression that the stock exchange only disseminated market orders and execution reports through market feeds. – Randomblue Oct 23 '12 at 9:06
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    1) yes, sorry for the confusion. 2) to go from one meaningful order book state to another is one tact. 3) yes, though your feed dictates what you get, ITCH/multicast for instance gives you diffs most of the time (only positions that actually changed) – hroptatyr Oct 23 '12 at 9:29
  • Thanks. Regarding 2) where did you find the definition? The obvious search is less than helpful. – Randomblue Oct 23 '12 at 9:54
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    Oh well, I signed NDAs but at least in NASDAQs documentation on how the crossing works they use that term. Synonymously they also use cycle and round. Maybe I should go for cycle everywhere. – hroptatyr Oct 23 '12 at 9:58
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From Investopedia - Tick Definition:

The minimum upward or downward movement in the price of a security. The term "tick" also refers to the change in the price of a security from trade to trade. Since 2001, with the advent of decimalization, the minimum tick size for stocks trading above $1 is 1 cent.

Share price changes have gone down to microseconds, and will go down further. Now profits are made in microseconds as machines and high frequency trading have replaced humans on the electronic exchanges.

Re: Are there any restrictions regarding the number of price changes every second?

I seriously doubt that, as the going says it improves market efficiency, and people with more money can only exploit these features. So banks will always say no to regulations and with the SEC consisting of previous bankers, the result goes without saying.

  • Does not answer the question. – Navin Jun 10 '15 at 23:41

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