Thanks Bob, this is purely an opening thought in a long winding road of investigation and learning. I'm new to trading but not new to being an analyst and I'm in the initial slopes of my learning where I'm taking random paths that will be dead ends but give me much in the way of understanding the lay of the land further up the mountain, if that makes sense. It's not hedging, per se, I was wondering about but playing both sides of the more 'predictable' volatility I've seen during the Asian and European trading times of the ES. Being able to place trades for small gains on expected channels of variation, rather than find multiple entry points... I'm running the data on five years of minute by minute ES highs and lows for different time periods and looking at probabilities - I'm aware this is incredibly unlikely to raise anything worth 'gambling' on but it will provide me with a much more empathic understanding of how ES works throughout the day. I found the attached graphs on a paper online and it's left me with a lot of 10% concepts. That lack of volatility at the close of the day, while volume, trade numbers and trade size spike is itching at the back of my mind... I also had a quick look at variation from the opening price on ES for the past couple of years andI'm also looking at other peak times of volatility to see if volatility is more predictable than a move in one direction only. Probably all dead ends but the bones of these ideas will, hopefully, be the foundations for some working strategies in the future.
The CME states you're market position(s) must be exposed to market risk - being long/short the same contract is a violation of rule 534 (wash trades). Q6: Is it acceptable to contemporaneously enter buy and sell orders for accounts with common beneficial ownership if the buy and sell orders are given to different FCMs or to different floor brokers for execution? A6: The potential for regulatory exposure in this situation is significant. If the orders trade against each other in whole or in part, or if both orders are executed opposite the same third party, an inference may be drawn that orders were structured with the intent to execute a prohibited wash trade. The fact that the orders were competitively executed without prearrangement may not protect the party entering the orders from liability if the execution of the orders produces a wash result. https://www.cmegroup.com/tools-info...egulation/CMEGroup_RA1308-5.html#pageNumber=1
The rule is talking about simultaneous orders, not boxed positions. Is there rule that says that if you are long in one account, you are not allowed to trade short on the other(Robert already indicated that holding it is prohibited)? I used to do below when swing trading: Let's say I am long SPY and price falls to/below my stop price. I would start day trading IWM around that price with the intent to end up short below my stop level (what I called defending my stop). So price breaks my SPY stop and I am short the IWM (so I am boxed). I see price starting to find support and I cover my short IWM for realized profit (larger open loss on spy). If the price comes back up to stop, I start looking for shorts again. If the price breaks down, I must be short again. Obviously, you may get short and price goes immediately against you, you may get yourself deeper in the hole, but the intent was to mitigate risk and allow for price move away from stop enough that I don't have to puke out at the worst possible time(usually around the open after overnight gap). Many times the open is the irrational extreme of the day, but no way to be sure, right? If only I could have used SPY instead of IWM, that would be much better hedge as there are times they don't correlate well enough. So that's my reason, fwiw.
Here's the thing, as Mr. Gumby stated regarding the answer to Q6... A6: The potential for regulatory exposure in this situation is significant. If the orders trade against each other in whole or in part, or if both orders are executed opposite the same third party, an inference may be drawn that orders were structured with the intent to execute a prohibited wash trade. The fact that the orders were competitively executed without prearrangement may not protect the party entering the orders from liability if the execution of the orders produces a wash result. That's the deal. If your longs are traded exactly against your shorts, i.e., you fill your own trades on either side of the book with your own opposing orders, you are in violation. The ambiguity comes into play because in most situations, you cannot tell if your orders are filled by your own opposing orders on other side of the book. And this is exactly the exasperation I heard on the phone from a CME rep when I asked him this specific question. In his words..."So long as your orders are not filled against themselves on the other side, as long as they are filled by an account not under your ownership, you should be fine." But it was a non-committal response. It is very grey. Ideally, the best thing one can do is to have the opposing orders 1 tic above or below the best price of the other side. This way they are not trading against each other, and allows other market participants to trade within the window you have created