POLL: Tick Size

All else being equal, would you prefer a smaller tick size or a larger tick size?

  • Smaller

    Votes: 29 65.9%

  • Larger

    Votes: 15 34.1%
  • Total voters
    44
Quote from Thunderdog:

As I had expected, the majority of respondents -- three quarters as of this writing -- favor smaller tick size. I was hoping to get an understanding of why anyone other than people who trade nothing but the bid/ask spread would prefer a larger tick size. Unfortunately, the minority of respondents who voted for larger tick size did not explain the rationale for their choice. If you are one of the respondents who favors larger tick size and don't limit your trading solely to the bid/ask spread, would you please explain your preference?
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OK, I voted for larger tick size and I will tell you why.
  • The trading vehicles which have the larger tick size have the greater volume
  • Is easier to scale-up in size with the larger tick trading vehicles
  • On a tick-by-tick basis, it is easer to make X amount of dollars with a larger tick than it is with a smaller tick
  • It's easier to go down than it is to go up the ladder with tick size ... if you're already trading ES, deploying part of your trading portfolio to include the ZN and the NQ (for example) is easier than the opposite (say, to go from trading 10 contracts on the YM and diversyfing into other indicie).
 
The tick size on the NQ was cut in half early April 2006. At the time the average weekly volume was 1.53M contracts. One year later the average weekly volume was 883K contracts. Although that average is higher (but declining) now at least in part
because of the volatility seen earlier in the year.

The eCBOT Bond (ZB) futures tick size was cut in half nearly two months ago. Before average daily volume was 651,491 contracts. Now it's 276,697 contracts.

I imagine some of the differences in volume are longer term changes in market conditions and/or maybe some normal seasonal variations. However I'm also inclined to think that at least some of the reduction in volume was due to the tick reduction. I'll let the "experts" debate how much.

I remember the NQ before the tick reduction and of course the reduction in the bond (ZB) tick was very recent. In both cases the nature or "personality" of the instrument changed, rather significantly IMO. At least in the very short time frames. More specifically they became much more jumpy.

Why anyone would wish those changes on the ES contract is beyond me.
 
If anyone here really cares about this topic then i would suggest you down load this paper and read it.... the smaller the tick size the tighter the spread.. it is pretty self explanatory.. imagine if the spread in the ES stayed at (1 ) tick .. and the point value was 5 bucks... the spread would be 5 bucks.. instead it is $ 12.5. It works for the ym and it the Russell... also the qqqq and other cash indices typically trade in penny increments.. it would make sense and lower costs of trading overall.... also i do not see the logic in what MBro says about the tick value.. the big dow $ 25 a point has almost no volume.


I am concerned about tick size..not value .. I am assuming the contract size stays the same...

Example: Would you want to trade stocks that only traded in 5 cent increments or 1 cent.. exactly... volume has exploded on stocks since they did away with the fractions.. and 1/8th was 12.5 cents a share and a 1/4 was holy crap .. .25 cents a share.. now thats a lot of slippage!!!!!!!

Stocks only further prove my point that lower tick Values are good for traders.. especially when you utilise stops and limits... they get triggered more readily because they can be violated easier...

AS MORE FUTURES EXCHANGES ARE OPENED AND THE CME HAS TO COMPETE.. THEN YOU WILL SEE FEE REDUCTIONS AND THE TICK SIZE REDUCTIONS..WHIHC WILL ULTIMATELY PROVE THAT TICK REDUCTION DOES IN FACT REDUCE SPREAD AND OVERALL TRADING COSTS WHILE INCREASING LIQUIDITY AND PRICE DISCOVERY. Four seasons exchange needs to open and soon!!!

Here is the paper:
 

Attachments

Quote from Thunderdog:

I'm not sure I understand what you mean.
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I have that effect on people !

The YM is 1 tick = 1 point...easy to calculate the math on the fly. The value of the tick is another story, but as was stated by another poster, the big dow has no volume.
 
Quote from jaytrader100:

If anyone here really cares about this topic then i would suggest you down load this paper and read it.... the smaller the tick size the tighter the spread.. it is pretty self explanatory.. imagine if the spread in the ES stayed at (1 ) tick .. and the point value was 5 bucks... the spread would be 5 bucks.. instead it is $ 12.5. It works for the ym and it the Russell... also the qqqq and other cash indices typically trade in penny increments.. it would make sense and lower costs of trading overall.... also i do not see the logic in what MBro says about the tick value.. the big dow $ 25 a point has almost no volume.


I am concerned about tick size..not value .. I am assuming the contract size stays the same...

Example: Would you want to trade stocks that only traded in 5 cent increments or 1 cent.. exactly... volume has exploded on stocks since they did away with the fractions.. and 1/8th was 12.5 cents a share and a 1/4 was holy crap .. .25 cents a share.. now thats a lot of slippage!!!!!!!

Stocks only further prove my point that lower tick Values are good for traders.. especially when you utilise stops and limits... they get triggered more readily because they can be violated easier...

AS MORE FUTURES EXCHANGES ARE OPENED AND THE CME HAS TO COMPETE.. THEN YOU WILL SEE FEE REDUCTIONS AND THE TICK SIZE REDUCTIONS..WHIHC WILL ULTIMATELY PROVE THAT TICK REDUCTION DOES IN FACT REDUCE SPREAD AND OVERALL TRADING COSTS WHILE INCREASING LIQUIDITY AND PRICE DISCOVERY. Four seasons exchange needs to open and soon!!!

Here is the paper:
More...
Excellent and informative post. Thanks for the paper. You and I are on the same side of this debate. Aside from those traders who scalp only the bid/ask spread, I still cannot understand why anyone would want larger tick sizes, which obviously result in higher execution costs.
 
Quote from MandelbrotSet:

...It's easier to go down than it is to go up the ladder with tick size ...
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Accepting this point at face value, I don't understand how your observation supports a larger tick size being in the trader's interest.
 
Quote from Thunderdog:

Accepting this point at face value, I don't understand how your observation supports a larger tick size being in the trader's interest.
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The size traders will trade the larger tick size contracts.

The smaller traders will trade the smaller tick size contracts ... there already IS a contract with small tick size that trades congruently with the ES ... it's called the YM.
 
Quote from MandelbrotSet:

The size traders will trade the larger tick size contracts.

The smaller traders will trade the smaller tick size contracts ... there already IS a contract with small tick size that trades congruently with the ES ... it's called the YM.
More...
I don't really buy that argument as you present it. I personally don't much like YM, and its volume is far lower than that of ES and only about half that of NQ. CME seems to have a stranglehold on indexes in the US and, coincidentally, YM originated at the CBOT. Perhaps now that CME and CBOT have recently merged this will bode well (or at least better) for YM's volume in due course. But I'm just guessing here.

Aside from its longer tenure and SP's earlier dominance in the US index market, I think one of the reasons that ES has considerably higher volume is because its tick size is disproportionately larger than that of SP in relation to the contract size, giving arbs a play not quite as available to the rest of us. Why you would want to give someone else an advantage that you yourself cannot fully exploit is beyond me. However, I'm sure the arbs are grateful. :D

In any event, a larger tick size increases execution cost. Since it is a matter of scale, I would think that it has little to do with trader size. Aside from the ES/SP arbs and true bid/ask scalpers, I thought it was a given that most traders, irrespective of size, would want to enter and exit as cheaply as possible. This means smaller tick size rather than larger tick size. Tick size doesn't affect the index's range of movement. It only affects the cost of doing business.
 
Well, it looks like this thread has run its course. I'm pleased to see that about two-thirds of respondents prefer smaller tick size. With this in mind, I will make one more appeal to those in favor of smaller tick size who have not yet contacted the CME regarding ES to kindly do so, asking for a smaller tick size that is at least proportionate to that of its larger counterpart, SP, in relation to contract size.

info@cmegroup.com
 
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