CME Group, responsible for the E-mini S&P and other global markets, has been producing some great videos lately. This one discusses tick movements. If you’re a beginner trader, you should really watch this.
All futures contracts have a minimum price fluctuation. This minimum movement is called a “tick.” Although a market’s price movement is seemingly random, the value for each tick is always the same because it’s defined by the exchange. In the case of the E-mini S&P 500, the CME (Chicago Mercantile Exchange) has structured the E-mini S&P 500 so that each tick is worth $12.50. Each market (aka “contract instrument”) can have a different tick value. Specifically, the CME has decided that each index point (“contract unit”) of the E-mini S&P 500 is worth $50. They also decided that four ticks equal one index point. That’s how you arrive at the $12.50 per tick and the market’s tick size of 0.25. Further, $50 (contract unit) * 0.25 (tick size) = $12.50
Here’s another example using the Crude Oil market. The tick size is 0.01. The contract unit is 1,000 barrels. Therefore, 1,000 (contract unit) * 0.01 (tick size) = $10 tick value.
Okay, okay, but why does the E-mini use $50 per index point and the Crude Oil use 1,000 barrels? Again, that’s decided by the exchange. In defining these values, the exchange considers the “size of the financial instrument” and the “requirements of the marketplace,” as mentioned in the video. The goal of the tick size is to provide traders, investors, corporations, etc. with optimal liquidity and tight bid-ask spreads. Also, if you’re talking about a physical commodity like oil vs. the derivative value of a stock index, the contract unit will most certainly be different!
Curious about other markets and want to try calculating the tick size yourself? The CME Group’s website has contract specification pages for each of their markets. One of the best ways to use their site is to simply search for the market you’re interested in on their search page.