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April 1, 2014

Why do Treasury bond futures have weird tick sizes? I can understand a \$1 tick value, or \$10, or \$25, or some easy to add-and-subtract number like that. But \$31.25?

One tick in a 30-year Treasury bond future (symbol: /ZB on the thinkorswim® platform) has a \$31.25 dollar value. \$31.25 comes from the days when everything—futures and stocks—traded in fractions of points. Stocks used to trade in 1/16 increments, which is a relic of the old Spanish “pieces of eight.” Bond prices traded in finer increments. Half of 1/16 is 1/32. 32 ticks still represent a full point in bond futures, even though stock prices have moved to full decimalization, because the face value of Treasury bonds is \$1,000. And \$1,000 divided by 32 = \$31.25.

I know I can buy stocks on margin and put up 50% of the shares’ value. I can do the math on that. But how do they come up with the margin requirements for futures?

A futures margin (the amount of money you have to put up to control a futures contract) is considered a performance bond against potential losses. Larger, more volatile futures contracts have higher margin requirements because of larger potential losses. For example, /ZB Treasury bond futures have an initial margin of about \$2,700. /ES E-mini S&P 500 futures have an initial margin of about \$4,500. The initial margins are related to the contract size and estimated volatility of the future, and are determined by a +/- price change. The futures exchanges determine a one-day likely maximum price change, and multiply that by the size of the futures contract to get the margin requirement. Individual broker/dealers can have higher margin requirements than the exchange minimums.

FIGURE 1: FAMILIAR FACE.

Futures trading is nearly identical on thinkorswim as its option and stock-trading counterparts. But learning the nuances of futures is crucial. For illustrative purposes only.

What’s the contract size of a future?

A futures-contract size is the amount of the product that the future represents. It’s almost always a fixed number, and tries to be a useful and practical amount for hedgers and speculators in that product. For example, an oil future represents 1,000 barrels of oil. One corn future represents 5,000 bushels of corn. The E-mini S&P future represents \$50 times the price of the S&P 500.

In my account I trade stocks and stock options, but I can’t trade futures. I can see the futures quotes on the thinkorswim® platform, but why can’t I enter an order?

Brokerage accounts are regulated by specific government agencies and industry groups. The SEC and FINRA regulate trading in stocks, stock options, ETFs, and mutual funds. All those things are associated with stocks (i.e. equities). Futures and futures options are different. They’re regulated by the Commodity Futures Trading Commission, or CFTC. The goal of the CFTC is very similar to that of the SEC and FINRA, and basically encourages the efficiency of the futures markets, ensures their financial integrity, and protects participants against fraud, price manipulation, and abusive practices.