DRW is all about spread trading, too. What do you know about them? I never placed much stock in prop firms that had everyone trading the same markets and essentially doing the same things. And predictably most of them are gone. I urge my clients to swing trade exchange supported spreads, since the margins are so favorable. And with a universe of tens of thousands of spread combinations on all electronic markets - there’s always opportunity. From my experience, clients who swing trade spreads spend far less on commissions than they did when they were day trading outrights.
I've been looking to do spread trading in the conventional markets. I've done it in Crypto and it's pretty low Risk, plus setups come fairly frequently. I want to learn the ropes in conventional markets. Do you have any resources to point me to? thx
Seasonals are about ten percent of the spread trading universe. It’s a very limited perspective on what is possible and available.
You're the master @bone. I agree with bone in the sense the universe is limited. However for a small account it's probably all you can do. If you're super well capitalized I'd imagine you have an opportunity to essentially play market maker. I'm not even sure what kind of startup capital you'd need for that - 250k+? Unless you're talking about using spreads to reduce margin on directional bets.
I’ve had hundreds of clients start with very modest accounts - $20K ish, and clearing a top tier Chicago FCM that knows who to correctly margin spreads. There are a myriad of reasons for spread differentials to converge or diverge - supply versus demand rebalancing, commercial order flows creating forward curve dislocations, institutional portfolio rotation, producer hedging, industrial user hedging... To say that order flows are entirely predictable based on something as nebulous as “seasonality” is a dangerous oversimplification IMO. You can model spread differentials by price and you can take trade entries using your price based model and you can be quite successful at it. In that sense - you’re really not concerned about what’s driving the market. If you are an expert at all things Cotton - by all means specialize in Cotton. If you are an expert in short term interest rates - by all means specialize in SOFR and Eurodollars and T-Bills. But that shouldn’t stop you from modeling price and spread trading.
There is precious little on modern methods for spread trading futures. I don’t consider seasonality to be ‘modern’. Let me add some color. I do very well modeling and trading intra markets exchange spreads in the Coffee, Sugar, and Cocoa markets. Been really consistent for me since I included them in my universe several years ago. And I know **very little** about those products. I model the price differentials, use my proprietary indicator package and rules set, then take my entry and set my stop-loss and profit targets. Just like I do for Eurodollars and Crude Oil and a hundred other instruments with exchange recognized and supported spreads.
That’s not what the CME piece or even myself are advocating per se. Pure Stat Arb would require extremely high correlations and automation. And as you can imagine - those are quite competitive and populated trades. Would require something along the lines of a prime brokerage omnibus account typically.