Tuesday, July 21, 2009

Cost of Trading the E-Minis (Spread + Commission)

Question posted on Ask E-Mini Player by Fxchartist:
Hi emini, I only trade spot currency and I have no idea about the futures market so can you please tell me what is the spread of emini SP500? 0.05?? I'm curious because I see index future trader like you tends to scalp for ticks so I'd wanna know what is the typical cost of 1 contract of ES (spread + commission ). Thanks.

Retail Trade Cost
The S&P 500 E-mini Index Futures move in 0.25 point increments (0.25 point = 1 tick). Each tick is worth $12.50 ($50 per full point). Retail commissions range from $3.80 - $4.80 per round-trip transaction, so if you're selling at the Bid or buying at the Ask, the total transaction cost (spread + commission) will be $16.30 - $17.30, which means you have to make a minimum of 2 ticks to cover your cost. This is where members of the exchange have a huge advantage over retail traders. Commissions for exchange members can be around $0.30-0.40 per round-trip.

The Spread
S&P 500 E-mini Index Futures are traded on CME's Globex system and all participants, exchange members as well as retail traders, have equal access to the order book which displays 10 levels of price information on the Bid and Ask side. The system operates on a first-in-first-out (or first-in-first-filled) basis. For example, if there are 200 contracts at the bid and you enter a limit buy order at the bid, your order will be filled once the 200 contracts in front of you have been filled. Retail traders can enter Limit Buy orders at the bid or Limit Sell orders at the Ask if they want to avoid paying the spread. Be mindful that your order may not always get filled and you could miss out on a good trade. It really depends on your strategy, but generally speaking, scalping for ticks is not a viable strategy for retail traders. Retail traders should be shooting for at least 2 points per trade, if not more. From my experience, if your trading is based on high momentum, it's better to enter at the market (buy the ask, sell the bid) and then, depending on market conditions, work the order book a little on the exit once your position is profitable. If you're trading in a choppy market, it's better to work the order book on the entry, i.e. buy at the bid and sell at the ask.

This area is often overlooked by retail traders. The brokerage business is extremely competitive these days, and lower commissions are available even to low-volume retail traders if they just ASK for them. After speaking with several retail traders over the years, the typical thinking is "it's only $5, and if my strategy is profitable, who cares about saving a buck on commissions?" That's fine when you're trading 1-lots a few times a day, but as your transaction volume increases, the dollars start adding up quickly. You should negotiate and try to get the best commission rate possible. If you're paying more than $4.20 per round-trip, you're just throwing money away. I feel obligated to mention my broker, Anthony Giacomin at Infinity Futures. His service has been top notch, and I know for a fact that he offers great rates to retail traders. His direct email address is a.giacomin@infinityfutures.com Alternatively, you can fill out the form at this link and he will contact you promptly.

Low-cost Exchange Membership Option
A low cost option that new traders should look into is the B4-IDEM seat at the Chicago Board of Trade. This would require you to trade the E-mini Dow, but your trade costs will be significantly lower. The IDEM seat can be leased for around $130 per month, or purchased for around $15,000. If you decide to purchase the seat, you can use the equity value of the seat ($15K) towards the performance bond (margin) at your clearing firm. I think this is an excellent way to get started since the mini-Dow usually moves in lockstep with the S&P 500 E-mini. Go to the CBOT Membership Pricing page for more information.

Links to additional information
E-mini S&P 500 Futures Contract Specifications (CME Group)
E-mini Dow ($5) Futures Contract Specifications (CME Group)
The Basic Education (CME Group)
Membership at CME Group

Monday, July 20, 2009

Ask E-Mini Player

When it comes to trading the markets, I don't claim to be an expert (far from it), but I'm certainly not a novice either. The point of this post is to allow people to post their questions; anything market or trading related goes. In the process of answering the questions, I hope we'll all learn something new. The question may also spark some healthy dialogue and we'll all benefit from the collective knowledge. If I can't answer the question, I'll try to direct you to other resources where you may find an answer.

So, if you have a question, just post it in the comments section. If no one posts any questions, I guess I'll just delete this post; beauty of online content - one click and *poof* it's gone :-)