What Is the Concept of ‘Tick Size’ and How Does It Limit Spread Narrowing?

Tick size is the smallest allowable increment in which a security's price can change or be quoted. If a security's bid-offer spread is equal to the tick size (e.g.

$0.01), it is considered "tick-constrained." The spread cannot be narrowed further unless the tick size is reduced. This regulatory constraint can prevent the spread from reaching its true, market-determined minimum, especially for highly liquid assets.