The tick size for a security trading on an exchange that meets the criteria of effectiveness. It is a ratio (known as tick-to-price ratio) that is calculated using different inputs in the nominator and denominator. For example, it is measured as the dollar tick size divided by dollar closing price:
Tick-to-price ratio= dollar tick size/ dollar closing price
It may also be calculated by relating the dollar volume weighted average tick to the price:
Tick-to-price ratio= dollar volume weighted average tick/ price
In plain terms, the effective tick size (relative tick size) or tick-to-price ratio is the absolute tick size divided by the possible price (or a measure of price) in the defined price range. For a price range, the lowest, middle, and highest values of this ratio are the absolute tick size used in the range divided by the highest possible price, the mid-point of the price range, and the lowest possible price, respectively.
