Emini trading increment

Discussion in 'Index Futures' started by Tea, Oct 27, 2002.

  1. Tea


    With Emini S&P volume surpassing that of the pit traded contract – isn’t it time for the Emini to trade in .10 increments like the pit contract instead of .25?

    The liquidity is there. The Emini doesn’t need the pit contract arbitrage to survive. In fact, the Emini has taken over the roll of price discovery for the S&P. The traders in the pit watch the Emini for trade direction.

    So, why are Emini traders hobbled with an increment (slippage) that is 2.5 times that of the pit contract?

    In the 1980’s the Nasdaq market makers did a similar thing by keeping the spread (slippage) on highly liquid stocks like Microsoft and Intel at .50, whereas now the spread is pennies. It was only action by the SEC that eliminated this problem.

    With the Emini, I believe that it will only be action by the CFTC that eliminates the discriminatory difference between the increment of Emini vs. the pit contract.

    Write a letter to the chairman and ask that he look into this.

    You are not going to go from unprofitable trader to profitable trader from this change alone – but every little bit helps.

    James E. Newsome
    Three Lafayette Centre
    1155 21st Street, NW
    Washington, DC 20581
  2. well it wasn't enough to drive traders out of stocks with decimalization, nowsome one wants to mess up the perfect e mini.

    A man should be able to make a profit on one tick. Sometimes that tick is fought hard for, so let's not make it any smaller.

    I think the real solution is to just plant an S&P tree in the pit and tell visitors, "This is where the S&P was traded in the old days."
  4. Tea


  5. Man, if there was even the slightest hint that there was a proposal to reduce the tick level in the emini, i would sell all my assets and buy a few seats at the CME. The value of a membership has been declining due to the success of the emini. Any attempt to curb that enthusiam, would only result in the benefit of the institutional seatholder.
  6. Tea


    The answer to this problem is to allow the Emini to trade in .10 increments and if the liquidity is not there it will trade with a wider spread just like the lesser know Nasdaq stocks do even though they could have a penny wide spread.

    Let the market determine the spread and not the self serving boys club over at the CME.

  7. Pabst


    Tea is right. Period! Many futures, including the worlds most actively traded contract the Eurodollars, and the 3rd most active U.S. contract, the 10 yr. T- Note have reduced their tick size the past few years. The reductions were made not because of reduced volatility per se, but because institutions wanted access to futures pricing at bid/offer spreads that more accurately reflected increased liquidity and "tightness" in the cash market.

    When ES was created, concerns about liquidity necessitated the .25 tick. Certainly without arbing from the pit the contract wouldn't have succeeded as quickly as it has. But now that maturity has been achieved it is foolish to argue that by making the markets pricing mechanism less efficientgreater growth will occur. With ATR at these levels the true "cost' of liquidity has risen considerably, and in my view to the detriment of the long term furtherance of the contract.
  8. A reduction in the spread would be awesome. While they are at it, why not knock the NQ down to .25 so I can lose 1/2 as much twice as fast.
  9. Actually I think the solution would be dual electronic and pit traded big S&P contract. The pit would be gone within two years.

    You may be right about the .1 change on the EMinis. If they ever do change to .1 ticks then I sure hope this is the case. It's not like I wouldn't rather pay $5 than $12.50 for a fill. :) The EMini may have achieved the needed liquidity so that fiddling with the minimum tick wouldn't do too much to lessen liquidity. But I still think there is a magic $ number per tick that is needed to make a contract attractive to arbs - as illustrated by the Dow contract woes. I think if you get too far under $10 per tick it just doesn't work very well because of the commission and clearing fees hurdle. I'd be interested in hearing how minimum $ ticks on the two contracts Pabst mentioned compare to the the EMini, as well as their average daily ranges.

    On the liquidity issue, volume does create some liquidity, but arbitrage creates a lot more liquidity. Liquidity after all isn't the same thing as volume. Liquidity has more to do with how many ticks you will need to pay to get into or out of your position, and this is more a function of how many contracts are being bid and offered at the time. Bids and offers are dominated by arbitrage. The little guy simply can't do enough size to make a market liquid with their 1-3 contracts and at $5 per tick most couldn't cover commission costs. Even when you get down to the cheaper commissions there is an ultimate limit that is dictated by cost.

    And one more thought to think about. When the big S&P contract did a reverse split from $500 to $250 and from .05 minimum tick to .10 the thing that stayed the same was the $ per tick of $25. This change effectively doubled both bid/ask spread cost on a leverage basis (5% to 10%) and the commission cost as well. In other words it got twice as expensive to trade. You'll recall that at this time retail commissions were still around $20/rt. Yes it made the contract more affordable to individual traders I will concede. The cry at the time was that the doubling of cost would kill the contract. But in spite of the increased cost the change dramatically increased contract liquidity. I don't think that increased participation alone accounted for the increase, as the volume continued increasing, though gradually. At the time the change was made it was not uncommon for the market to trade in .5 or even 1.0 increments much of the time. It got much more orderly after that and actually started trading in .1 increments (which was rare even before the change).

    If they ever do implement a .1 EMini spread, I sure hope you guys are right about the ramifications.
  10. If it isn't broken; don't try to fix it ...
    #10     Oct 28, 2002