Liquidity in time spreads vs. outright energy

Discussion in 'Commodity Futures' started by thecrackfox, Nov 15, 2017.

  1. thecrackfox

    thecrackfox Guest

    I've noticed that throughout energy products there's usually more on the bid/offers in the spreads than there is in the outright products themselves. E.g., right now WTI Crude Sep 18 Contract is 27 bid / 10 offered. However, CLE Sep 18/Oct 18 is 716 bid / 13 offered. This repeats throughout the energy complex with everything from Gas Oil, RBOB Gasoline to heating oil.

    Why is there more apparent liquidity in time spreads than in the actual outrights?
     
  2. Robert Morse

    Robert Morse Sponsor

    Less Risk and Margin+a function that hedgers require.
     
  3. thecrackfox

    thecrackfox Guest

    There's less risk & margin in STIRs calendars but the same pattern doesn't hold...
     
  4. bone

    bone

    I honestly can't think of a serial expiry futures contract where there isn't way more volume on the spread bid/ask (especially for the prompt month spreads) versus the flat price outright front month futures contract. The spreads are the domain of commercials, institutionals, and smart big swinging dick spec traders.
     
  5. bone

    bone

    Gosh we must be looking at different order books. I'm looking at a Eurodollar Butterfly that is literally 15K+ best bid and 14K+ best offer - way way way more volume than any one of the three individual outright leg components best bid/offer.
     
  6. thecrackfox

    thecrackfox Guest

    Oh, oops. You're right. And it's the same even for the CME bond futures.

    Thanks for the reply, bone.

    Yeah, interesting. I get that spec traders might prefer spreads for the reason that they are making a much more specific bet and cutting out out many other price-influencing factors out of their control, but I'm curious about the hedgers & commercials. When I think of STIRs & hedging, I think "bank hedging swap or cash bond flow" and in that case it's either a bundle of STIRs or a blend of bond futures, and while they are putting on a spread, it's not one they've got on within the futures market (cash or swaps vs. futures basket/buckets instead of futures vs. futures).

    Apart from speculation, would anyone know what kind of hedging would require big players to spread within the futures market, e.g, how would a STIR fly help a bank hedge flow? or energy fly help a refiner? If there's nothing, then I assume it's all just speculative volume there in the spreads fading hedger flow.
     
    TraDaToR likes this.
  7. bone

    bone

    In terms of Spread constructions like butterflies Convexity shift protection. Big time.

    Notice that every commercial line of credit or even a home mortgage rate contract specifies LIBOR plus basis points.
     
    thecrackfox likes this.
  8. bone

    bone

    The Fed Funds future is essentially a proxy for unsecured bank credit, and the Eurodollars and Euribor are essentially the same for unsecured commercial credit. These STIRS have literally hundreds (if not thousands) of inter and intra market spread opportunities.

    Just look at the impressive open interest in the later duration (beyond the prompt month) in the CME Eurodollar futures:

    http://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_settlements_futures.html

    There is also quite a bit of open interest in the later duration Crude Oil futures:

    http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_quotes_settlements_futures.html

    The vast majority of this later duration intermarket open interest is spread trade volume.
     
    spread'em likes this.