anyone ever experience slippage in the ES?

[bumblebuzzard]

I think it is important to realize that optimum tick size is not just a matter of making it as small as possible. This is because tick size has a real influence on the time priority rule.

When tick size is trivally small, the cost to obtain price priority is also small, and this decreases price competition. On the other hand, if the tick is too large, traders are hesitant of improve prices because of the increased cost of entry.

As a result, setting tick size is a balancing act for exchanges to which they pay careful attention; and it is misleading to ascribe larger tick sizes only to the desire to placate large or influential trader/members.

 

[Thunderdog]

NQ's tick size was reduced from $10 to $5, and it doesn't seem to have been negatively affected from my perspective. On the contrary. Therefore, why would a similar tick size potentially be detrimental to ES?

 

[erToo]

If they reduced the tick size it would probably increase the amount of contracts traded. This would increase CME profits as most of their revenues come from transaction fees.

So it would seem that the CME is sacrificing company profits to appease a small cabal of pit trading arbitrageurs. If I was a shareholder, I don't think I would like that.

The institutional trading organizations are going to have to grow a pair of balls and start asking for reduced tick size in the ES. Its not like the old days were pit traders could screw with an institution's orders if they made noise about trading costs. The shoe is now on the other foot but some of the institutions still act like its the 1980's.

 

[erToo]

Ha, funny. Then why is the tick size for the pit set at .10?

Quote from bumblebuzzard:

I think it is important to realize that optimum tick size is not just a matter of making it as small as possible. This is because tick size has a real influence on the time priority rule.

When tick size is trivally small, the cost to obtain price priority is also small, and this decreases price competition. On the other hand, if the tick is too large, traders are hesitant of improve prices because of the increased cost of entry.

As a result, setting tick size is a balancing act for exchanges to which they pay careful attention; and it is misleading to ascribe larger tick sizes only to the desire to placate large or influential trader/members.

 

[bumblebuzzard]

It may well be that reducing tick size would be beneficial. My points in posting above were a) there is a dimension to the problem that has not been discussed on this thread, and b) the belief that tick size is set just to satisfy a priveledged group of traders perhaps doesn't take this into account.

 

[bumblebuzzard]

Quote from erToo:

Ha, funny. Then why is the tick size for the pit set at .10?

It's too small in the opinion of many analysts and has adversely affected the markets. The reason was an effort to satisfy traders who didn't understand the problem.

 

[Stardust]

ES should be .10=$10/tick $100/point. Then it would really rock!

 

[Thunderdog]

Quote from bumblebuzzard:

It's too small in the opinion of many analysts and has adversely affected the markets.

As I see it, the only thing that has adversely affected the pit traded contract is the arrival of its electronic counterpart which, if anything, is being held back by its unnecessarily large tick size. Would you have any links to those analysts' opinions that you refer to?

 

[bumblebuzzard]

Quote from Thunderdog:

Would you have any links to those analysts' opinions that you refer to?

Well, I was afraid someone would ask me that. I'll try to find some references.

Anyway, my only point is that tick size is a matter of judgment that is not limited to "How small can we get it?" Markets definitely react to tick size by way of the time priority rule. Too large is not good. But a market does not trade in the same way with a small tick as with a larger one, and it isn't necessairly better. It seems to me that too often these discussions are all about how traders are burdened by a large tick size and seldom about how reducing the tick would influence the trading. Maybe better, maybe not.

 

[erToo]

I'll grant you that there is an optimal tick size and too small a tick may not be the answer. Bear in mind however, that the pit contract for the SP is 5 times the value of the ES. So a .10 increment for the pit contract would be equal to a .005 tick increment in the ES versus the current .25. Something to consider if your studies of optimal tick size are based on the pit contract.

The way the tick increment is set-up now, it would be like a stock that trades at $100 (pit contract) having a tick increment of 1/8 and a $20 stock (ES) with a tick increment of 5/16ths.

Quote from bumblebuzzard:

Well, I was afraid someone would ask me that. I'll try to find some references.

Anyway, my only point is that tick size is a matter of judgment that is not limited to "How small can we get it?" Markets definitely react to tick size by way of the time priority rule. Too large is not good. But a market does not trade in the same way with a small tick as with a larger one, and it isn't necessairly better. It seems to me that too often these discussions are all about how traders are burdened by a large tick size and seldom about how reducing the tick would influence the trading. Maybe better, maybe not.