IB is terrible for spread trading - every client that comes to me clearing IB switches over to a clearing firm who offers the spreads to begin with but most importantly knows how to correctly margin the spreads. The exchange-supported implied spreads are a beautiful development and IB sucks cock regarding those as well. The CBOT is about 25% of what you can trade; you have the whole Eurodollar complex, you have the Eurex stuff, and you have the Liffe Euribor. I have clients in Australia who trade the SFE stuff, and I have clients in Singapore who trade the JGBs and the Asian stuff. Fixed Income is orders of magnitude deeper than the equities. And fixed income is a spread trader's wet dream. Futures vs. futures, futures vs. cash, all kinds of arbitrage possibilities. Options. It will blow your mind.
Thanks for the input. How about a benchmark for the curve, though? Is there a single or 2 spreads that everyone watches to get a pulse of the market? It's not like I expect to walk into a market where I have ZERO domain knowledge and take over. In fact, it's the opposite. As much as possible I'd like to avoid some of the pain that comes with learning all this basic stuff by trial and error. Like, it would be nice to know if I'm giving up edge on every execution just because my platform is missing functionality that everyone else has. Or avoid spending months writing code to do an analysis that is fundamentally invalid to begin with because I started with the wrong assumptions.
talk to bone, I've already told you everything I know, and maybe a little bit more trillions are at work in the interest rate mkts worldwide, just trying to gain a fraction of a percent
I've read the first half of this topic, but this warrants a reply. Who are you referring to exactly? You said it yourself there's a lot of "retail punters", and so far I've found only a small minority of people actually know how spread trading even works. There's a huge amount of people betting on stocks (and loosing) without the vaguest of ideas. I suppose that spreads themselves require a lot of know-how compared to scalping ES for example and thus only a small number of people does it. Why? So far I've come to realize the average trader is not very smart at all, at least not compared to people working in other semi-academic circles. Now my question would be, regarding spread trading: - How many of you have your own proprietary software for statistical anylsis (correlation, arbitrage, lag, etc)? Is this rare, or only used by the bigger trading companies? - If you do use something like this, how useful is it proving in finding good spreads in general?
Need own tools, but may be "just" spreadsheets... plus some C++ / R / Matlab, for fiddly bits. For short lived gyrations, single tick reversions etc, will need own execution algos also. Getting hard with perverse HFT competition however. How useful? Depends on you. Where's your edge otherwise? The easy stuff has been arb'd to zero, and beyond. Better then retail moving-averge single stock punters approach though. No idea how any of those geniuses survive. Agree that some trader / dealers living off order flow are not so bright. Who needs to be bright when you have a structural advantage to exploit? If you want to find bright traders, talk to institutional structured products guys, or any options / non-delta one desk. Ask them about hedging barriers...
Now my question would be, regarding spread trading: - How many of you have your own proprietary software for statistical anylsis (correlation, arbitrage, lag, etc)? Is this rare, or only used by the bigger trading companies? - If you do use something like this, how useful is it proving in finding good spreads in general? Answer: I teach my clients quick & dirty & effective. Bloomberg not required.
WHOOO-HOOOO! Soybeans - Jan and march contracts both last traded price at 14.5125! This cant last - premium should return to march so here goes. Worth paying a $25 spread + bro!
Robert Duvall looking at soybean prices : 'you smell that son?, nothing in the world smells like that. thats the smell of victory. I love the smell of soy-beans near the market close' spreads are market napalm dude.
Well, I show my clients how I do it - including finding spreads, checking correlations, calculating hedge ratios, etc. But we have about 400 + + spread combinations just using various iterations of the exchange supported implied spreads which you can find listed in the exchange SPAN calculation tables for spread margin credits - including pairs, butterflys, condors, strips vs. strips, packs, bundles...etc. etc.. Seriously, think about all the possible combinations in those alone. { 400 x 400 = 160,000 } Point is, you can make a very good living without bothering yourself to find something original and revolutionary, but I do show my clients how I at least go about doing it - without a Bloomberg. I have seen Gennady Gertsman and Harris Brumfield make tens of millions of dollars per year trading their own personal accounts in the interest rate spreads - all very plain vanilla missionary position stuff all up and down the yield curve. I spent three years sharing an office with Gennady and I could see his P&L on his TT a few times per day. And I personally have done really well doing some unique oddball quasi-arbitrage stuff like Copper versus the S&P 500, or a particular Asian currency spread versus a certain Eurodollar spread ( STIR cross vs. a currency cross, volatility adjusted ) The problem with someone's infatuation with a unique arbitrage or spread combination is that they simply do not hold up over time - and you don't know if it will be 2 days, 2 weeks, 2 months, or 2 years before it goes to hell and leaves a big mark on your forehead. The cointegration just eats you alive, and you have no advanced warning metric to tell you that the fundamental and statistical glue holding the relationships together are coming apart, and it is a sick feeling. In essense, it morphs into a pure divergence trade. Case in point ( just a few of many examples I personally know of and have traded in the past ): Nat Gas vs. PJM-W Power, Bund vs. US TY Note, Euro vs. Crude Oil, Euro vs. S&P 500, etc. etc.. I do that work on a case-by-case basis for HFs and some CTA's - there's alot to it, it requires alot of maintenance work, and it is not just a static ATM machine at your beckon call. The other point is that you probably will not get a SPAN margin credit from the exchange in terms of cap requirements. But you are spot-on correct about the knowledge base regarding spread trading and arbitrage: I've built up a nice little business working with a very limited number of clients on a consulting basis, and swing trading futures spreads for my own personal account. In fact, the client work provides a welcome diversion away from the screen and in my mind at least might keep me from doing something impulsive and stupid out of boredom.