Doug Green

The Chicago Mercantile Exchange (CME) production launched technical changes last week (10/5/2009) that affect traders using tick-charts.

I currently trade the E-mini ES and use three charts, a short term tick chart, a medium term tick chart (four times the short term), and a volume chart that is roughly equal to the medium term tick chart. I use the medium term charts for direction, and sometimes get better setups on the volume chart. When the medium term tick and volume charts get too far out of sync, it's worrisome.

On Wedneday, after the CME unbundling change, I was having a hard time determining direction. The medium term tick and volume charts were way-out-of-sync, which gave me pause. I now understand what happened. After the CME unbundling change, my tick chart became too fast and got out-of-sync with the volume chart.

The conventional wisdom is that you should multiply your tick charts by 2 or 2.5. The number to use partially depends on what days and times you trade. I've concluded for my style of trading that the multiplier for me is between 1.8 and 2.

Below the fold, ... how I came to that conclusion:

First, I wrote a TradeStation indicator that exported Tick and Volume data to CSV files (Download). It's not the prettiest code, but works. Put this on any tick chart and load as much data as you can. I have tick data for this chart going back to January 20, 2009, which is a relatively large sample (since TS only gives you tick data 6 months back). In the final analysis, I only used the hourly data but if you look at the code, you'll see that it creates daily, hourly, and half-hourly files

I then imported the hourly data into a spreadsheet, and created summary column for the ratio of Volume / Ticks, based on day of week, and time of day.

Note that Mon and Tue seem to have the lowest ratio. I interpret this to mean that there were fewer big players on those days. That makes sense to me for Mon, but I would of expected Fri, rather than Tue to be lower. Remember however, that we only have one week of data for the new CME, so this could change as we see more action.

You can see from the chart above that the average ratio change is 1.75, but this includes all days and all hours of the day. It's doubtful that you're actually trading from 5pm to 5am so some adjustments need to be made.

I usually start trading around 8am EDT and am done no-later-than 11am EDT. So I'm most interested in what happens between these hours.

So, in the final analysis, based on last week's data alone, I reject the 2.5 multiplier and concur with a 2x multiplier. I'll probably start out with a 2x multiplier next week, watch this data over time, and adjust accordingly.

Note that this change will affect back testing of strategies. I plan to run backtests using my old charts with data up through Oct 4th. Once we have enough data, I'll also run backtests on the new charts from Oct 5th forward. But I'd prefer to have more data than less. So backtesting going forward can't be done until sometime next year, probably 6 months from now. That's too bad :(

I'm not 100% certain that my TradeStation indicator is giving me the right data. But even if I'm getting the wrong Tick counts, I think that any error cancels itself out in the division. And, I'm comfortable that the ratios seem to be right.