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Why ES tick size is different to SP tick size


Hi All,

I recently sent an email to the CME to try and discover why the tick size on the ES (E-mini S&P future) is different from the tick size on the SP (The pit traded or big car S&P future). This is what I wrote:
quote:
Please can you point me to a resource that explains why the ES trades in tick sizes of 0.25 of a point and the SP in 0.1 of a point?
And this is the reply that I got...

quote:
there is no hardfast rule on tick sizes. Most ticks in the commodity and financial futures world are between $10.00 and $31.25.

If the E-mini tick were made to the same size as the SP...then your tick size in dollars would be very very small. Nothing wrong with a small tick size but one of the attributes is that there is some profit if a trader makes a tick on a trade. One thing that has hurt the stock market and ETFs is decimalization. You get multiple fills and multiple prices and very small profit increment... in addition, the real bid offer spread on size orders is nowhere near what you see on the screen. This is one of the reasons why the E-mini S&P 500 alone outtrades in dollar terms all 400 ETFs around the world.

Hope this helps....

by the way....on rare occasion...tick sizes do change.



First of all - many thanks to the member of the CME who answered a question that I've been trying to find an answer to for a long time.

I'm a great advocate of dropping the size of the ES to be in line with that of the SP contract. I believe that there is sufficient liquidity that the ES can easily handle the transition.

During RTH (regular trading hours) on a normal day the ES contract averages around 1000 bids and offers at each of the 5 prices above and below the inside bid/ask. If the the tick size in the ES were to be dropped from 0.25 to 0.1 then that average would move to 400 contracts at each tick. This (in my opinion) is plenty of liquidity and would make the market even more liquid and "trade-able" for everyone.

Please post your comments on this...
Today I received another reply directly from the CME from a couple of questions that I asked on the 8/30/05 and 9/03/05. I admit that the response turnaround time is not the fastest that I have seen but I am very happy that I got an answer. I asked:
quote:
On 8/30/05: What is the possibility that the trading increment per tick will be changed in the ES from 0.25 to 0.1 in line with the SP?

And on 9/03/05: Perhaps the question that I should ask is: Why is the ES traded in
0.25increments and the SP in
0.1 increments?

And received this reply on 1/11/05:

quote:
When E-mini S&P 500 futures were first introduced the rationale was the tick size had to be big enough in relation to the S&P 500. The S&P had a tick size of $25.00 and the tick size of $12.50 was a good fit for the Emini S&P 500. Also, the different tick sizes help foster arbitrage between the pit and the screen when the ES first started trading.

Now that the product has grown from 7,000 contracts the first day of trading to over 800k, CME has received feedback at cutting the tick size from .25 ($12.50) to .10 ($5.00). This is something CME is monitoring currently.

Once again - thank you very much to the member at the CME for answering this question! It really helps knowing this sort of information.
I believe that the imminent NASDAQ tick size change is a precursor to the CME changing the tick size on the ES.
If this does happen (ES tick size changed from 0.25 to 0.1) then I have to start thinking about converting all of my historical ES data to 0.1 tick sizes. With the change in the NQ it's a bit easier because the tick size is halving. However, in the ES it's a little bit trickier because the tick size will go from 0.25 to 0.1 or 4 ticks per point to 10 ticks per point.

More thought required... Ideas welcome...
Just a few random thoughts on this possible future scenario...

If the CME changes the ES to 0.10 per tick, we would need 2 1/2 ticks in the future to equal the profit in one tick today:
1 point = .01 index points =$.50
Today: 1 tick = 0.25 index points = $12.50
Future: 1 tick = 0.10 index points = $ 5.00

This would tend to normalize the ES with the YM, making synthetic spread's between the two markets a bit easier to construct and implement in real-time trading. I think this would benefit the YM market with more order flow over time.

Given more price points, I suspect the ES market would trade thinner at each individual price, similar to how the Dow Mini contract (YM) trades today. This leads me to two observations...

1. I would expect more slippage in executing market and stop orders within this new scenario.

2. But at the same time, limit order fills at the inside market would be a little easier to come by (less competition at each price), thus a higher probability of being filled within a tick or two of the inside market bid/ask.
Those are really interesting comments/observations.

I haven't spent much time examining spread strategies between YM and ES but you're 100% correct that they would definitely be easier to implement because the YM has been around 10 times the size on the ES for a long time and this would even things up a bit.

A quick look at the top 4 index futures:

YM: top 30 stocks
ES: top 500 stocks
ER2: top 2000 stocks
NQ: top 100 tech stocks

YM is based on a price weighted index and the rest on value weighted indices.

The CME operates all the indices except the YM which belongs to CBOT and the competition between the two is fierce with the CBOT introduction the Big DJIA future in an attempt to draw Big S&P future traders over.

Something that you mentioned that I hadn't thought about was the fact that changing the ES tick size from 0.25 to 0.1 might benefit the YM (and hence CBOT) with more volume which is not what the CME wants to do. That could be one of their reservations about making this change.