Price Discretization

Price discretization is the process of mapping continuous price movements onto a grid of predefined, finite price levels or ticks. Every financial instrument has a minimum tick size, which is the smallest increment by which its price can change.

This discretization creates a quantized view of the market, where prices can only exist at specific intervals. This has significant implications for quantitative models, as it introduces artificial jumps in price and affects the calculation of returns.

Traders must understand how the tick size impacts their strategies, especially when dealing with low-priced assets where the tick size represents a large percentage of the total price. It is a fundamental constraint imposed by the exchange's matching engine architecture.