Pip, point and tick

Three words describe how far a price has moved, and in ordinary trading conversation they are swapped for one another without much cost. In a contract specification they are not interchangeable at all. A pip is a convention about a decimal place in a currency quote. A point is one unit of whatever the last quoted digit happens to be. A tick is the smallest increment the price is permitted to change by, which is a rule of the venue rather than a property of the number. On some instruments all three coincide, which is exactly why the distinction is so easily lost.

The pip, a convention of the currency market 

Pip is shorthand for a price interest point, and it belongs to the foreign exchange market specifically. For most currency pairs it is the fourth decimal place of the quote, so a move from one rate to another is counted in ten thousandths. The convention breaks for pairs quoted against the Japanese yen, which historically carried two decimal places rather than four, so the pip there is the second decimal place. Nothing deeper than the size of the numbers drives that: a yen rate in the hundreds does not need four decimals to be quoted usefully.

Modern feeds quote one decimal place beyond the conventional pip, which is variously called a fractional pip, a pipette or a tenth of a pip. It exists because competition between price sources compressed spreads below the width of a whole pip, and a quote that cannot express a difference of half a pip cannot express the difference between two competing prices. A five decimal quote on a pair whose pip is the fourth decimal is therefore quoting in tenths of a pip, and a spread stated as a decimal fraction of a pip is reading that last digit.

The related word in dealing conversation is the big figure, which is the whole number part of a currency quote plus its first decimals. Dealers omit it when the market is moving quickly because it changes rarely, so a price quoted as two digits is quoting the pips alone and leaving the big figure understood.

The point, one unit of the last quoted digit 

Point is the general form. It means one unit of the smallest digit an instrument is quoted to, whatever that digit happens to represent. On an index quoted in whole numbers a point is one index level. On a share quoted to two decimals a point is one cent. On a five decimal currency quote a point is one tenth of a pip, which is why platform documentation that speaks in points and trading conversation that speaks in pips can describe the same movement with numbers that differ by a factor of ten.

Because a point is defined by the quotation rather than by convention, it is the most reliable of the three words to reason with when the instrument is unfamiliar: reading the number of decimal places in the quote answers what a point is, with no lookup required. It is also the term platforms tend to use in stop and limit distance settings, where a fixed distance has to be expressible for every instrument on the same scale.

The tick, the smallest permitted increment 

A tick is the minimum increment by which a price may change, which makes it a rule rather than a unit of measurement. Where the tick size equals one point, a price can take every value its decimals allow. Where the tick size is larger than a point, some values are simply not quotable: an instrument with a tick of five points can print prices ending in a multiple of five and nothing between them. Exchanges set tick sizes deliberately, because a coarser tick concentrates resting orders at fewer price levels and a finer one spreads them across more.

The word carries a second, older meaning that is still current: a tick is also one update of a price feed, which is where a tick chart and tick volume get their names. In that sense a tick is an event rather than a distance, and a market that is described as ticking slowly is producing few updates rather than moving in small increments. Both usages are standard and the context separates them.

Converting any of the three into money 

None of the three words means anything financially until it is multiplied by the contract size. The value of one pip, one point or one tick on a position is the size of that increment in price terms multiplied by the number of units of the underlying the position covers, converted into the account currency if the instrument is not quoted in it. That is a single multiplication, and it is the only bridge between a chart and a statement.

The tenfold gap between those two rows is the entire practical reason the three words are worth keeping apart. A cost quoted in points and a cost quoted in pips can describe the same charge and differ by an order of magnitude on paper, and the only way to tell which is which is to read how many decimals the instrument is quoted to.

Where the three diverge in practice 

On a five decimal currency pair, the pip is ten points and the tick is usually one point, so all three words are in play at once and none of them agree. On an index quoted in whole numbers, the point and the tick are the same thing and the pip does not exist. On a share quoted to two decimals with a tick of one cent, again point and tick coincide. The uncomfortable case is an instrument whose tick is coarser than its quotation precision, where a price can be expressed that can never be printed.

That last case is where the distinction stops being pedantry. An order placed at a price the tick grid does not permit has to be handled somehow, and platforms differ in whether they round it, reject it or hold it at the nearest permitted level. The behaviour is documented per venue, and it is a property of the instrument rather than of the order.