Is it Time to Reduce the Minimum Tick Sizes of the E-mini Futures?

Abstract

On the Chicago Mercantile Exchange (CME) so-called index futures contracts trade on the electronic GLOBEX trading system alongside the corresponding full-size contracts that trade on the open outcry floor. This paper finds that the current minimum tick sizes of the E-mini S&P 500 and E-mini Nasdaq-100 futures contracts act as binding constraints on the bid-ask spreads by not allowing the spreads to decline to competitive levels. We also find that, while exchange locals trade very actively on GLOBEX, they do not tend to act as liquidity suppliers. Taken together, our empirical results suggest that it is time for the CME to consider decreasing the minimum tick sizes of the S&P 500 and Nasdaq-100 E-mini futures contracts. A tick size reduction is likely to result in lower trading costs in the E-mini futures markets.