Old School Meets New Students – Getting a Handle on Interest Rate Futures Contracts

Part of understanding a Futures contract is to understand what a minimum tick and the dollar value of that minimum tick is. Markets like the Stock Index Futures are relatively easy to get a grasp of what these values are. While markets like the Interest Rate sector seem to be very challenging to new traders.

A minimum tick is the smallest increment that the price of that Futures contract can change from one price change to the next. Unlike a Stock price Futures will never trade between the bid and the ask price. If the mini S&P is bid at 1849.00 and Offered at 1849.25 you will never see a transaction being made between these two prices. The minimum tick in the mini S&P contract is .25. All things being equal the next trade should be at the bid or the offer. There are times when poor market liquidity causes the market to trade at bigger tick intervals due to news, technical stops being hit or some other event causing a disruption to the normal flow of orders.

The minimum tick value is the dollar value of each minimum tick. For the mini S&P that dollar value is $12.50. As each minimum price move occurs this would equate to an effect on your account of $12.50 per contract you are trading. A series of ticks will make up a point (also known as a handle). The mini S&P trades in .25 increments, meaning it would take 4 of these .25 moves to equal one handle.

1867.25 moves to 1868.25 = 4 ticks or 1 handle

If each tick value is $12.50 that would be $50.00 per handle

This was the easy information to understand because most new traders were raised with arithmetic dealing in decimals. For some of us old school folks we were raised to understand fractions. This makes understanding how the Interest Rate markets are priced in fractions a little easier.

Here is where old school meets new students. The longer term Treasury Futures started trading in 1975 at the Chicago Board of Trade. This included Treasury Bonds, Muni–Bonds and Treasury Notes. While the Treasury Bills and Eurodollar Interest Rate instruments started trading at the Chicago Mercantile Exchange. Fractions were a way of doing business at this time including the Stock market which later switched over to the decimal system. However, our beloved Interest Rate instruments did not make that switch over to decimal and has since remained in fractions.

Table 1 will illustrate the Interest Rate markets and their minimum ticks, tick values and handle values.

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