NASDAQ tick size change precursor to ES?

I believe that this change to the NASDAQ-100 tick size is a precursor to the CME changing the tick size in the ES.

Because the NQ is traded on much lighter volume they can use this change as a test to see how the systems cope with the change and smooth out any associated gremlins. Once they've done that they will put their team onto doing exactly the same thing with the ES. The ES is the most highly traded index future in the world (I believe - please jump in and correct me if I'm wrong) and as such they don't want to risk a change in tick size and it not going super smooth. So by doing this on the NQ first gives them a live test with the software and hardware needed to switch down in tick size.

Did the CME give a reason why they are changing the NQ tick size ?

This might be a pre-cursor to changing the ES tick size to match the floor SP contract tick size. If they actually did that, then I think the big SP volume would essentially vanish into the ES (just like it did in the ten-year bond futures.)

pt_emini - completely agree with you - could well be a precursor to ES tick size changing.

CME stated that the tick size change is "Due to customer demand"

I mentioned elsewhere that I think that they're using this as a "live test" and to make sure that the software and hardware is in place to have a smooth transition before they do it on the ES.

Much better to test software on NQ than ES for all the obvious reasons.

This also gives the rest of the trading community that ability the "back adjust" their data bases of NQ data to synthetically create historical data that matches the new tick size. Programmers are given a chance to try out different algorithms and get it right for the NQ before they are challenged with the conversion of the ES data.

The more that I think about this the more that it appears to be a test to see if they should convert the ES and if so how to go about doing it.

I called the CME this morning and talked to the man in charge of questions about the tick size changing in the NASDAQ-100 future and the E-mini NASDAQ-100 future.

There were a number of things that I learned.

The ND (Big NASDAQ) was launched in 1996 and initially traded in 0.05 ticks and the NQ (E-mini NASDAQ) was launched in 1999 and initially traded in 0.1 ticks. In 2000, just before the dot com bust, the NQ was trading at around the 4000 level and in handles and there were many requests to increase the size of the tick to handles. The CME did a few calculations and came up with 0.5 as being the optimal size for for a tick in the NQ. Subsequent to the dot com bust the NASDAQ index has fallen considerably (as you obviously know) and a tick size of 0.5 is no longer appropriate as it no longer matches the implied volatility of the contract. Using implied volatility calculations the CME came up with a best new size for the NQ as 0.25 and not 0.1 as it originally was.

(The implied volatility when the NASDAQ was trading at its peaks was around 50% and it is now down to around 17%.)

I also asked about this being a precursor to the tick size in the ES and was told NO WAY - this is not a test or a precursor or have anything to do with the possibility of the size in the ES being changed.

So there you have it - from the horses mouth.