A future trades at 4285 with a tick of 0.25 index points, a tick value of $12.50 and a multiplier of $50 per point. You capture half a tick on average per round turn across 400 lots a day. What is the daily gross edge in dollars?

A future trades at 4285 with a tick of 0.25 index points, a tick value of $12.50 and a multiplier of $50 per point. You capture half a tick on average per round turn across 400 lots a day. What is the daily gross edge in dollars?

Approach: Convert half a tick into dollars per contract first, multiply by the lot count for the daily figure, then divide the same dollar edge by the contract notional to see it as a percentage.

$2500. A tick of 0.25 index points is worth $12.50, so half a tick is $6.25 per contract per round turn. At 400 lots that is 400 * 6.25 = 2500 dollars of gross edge a day. Expressed against risk the same figure looks tiny: one contract carries 4285 * 50 = $214250 of notional, so $6.25 against that is 6.25/214250 = 0.0000292. That is 0.29 basis points. The distance between a healthy dollar figure and a fraction of a basis point is the whole shape of market making, since the edge per trade is small against notional and only pays through turnover. Doubling the lot count doubles the dollars while leaving the 0.29 basis points untouched.

Follow-up: Exchange fees are $0.85 per side and you cross the spread on 15% of your volume. What is the net daily edge?

Key concepts: tick value, notional, basis points, turnover.