Looking for illiquid futures/options market (electronic trading)

Discussion in 'Index Futures' started by Jana, Oct 18, 2002.

  1. Jana


    system testing in futures markets: we are planning to test some automated arbitrage programs. to do this we would need an
    illiquid futures/options market (electronic trading), preferably without any market makers. we have had some problems with
    cancelations of trades. does anyone has experience with the cancelation policy of exchanges like globex, ace/eurex,... is there
    some fixed tolerance level that you have to cross to get a trade canceled?
  2. MarkHyman

    MarkHyman Advanced Futures

    You may want to take a look at Trading Technologies.
    They have a product called the Autopreader, which is built
    for arbitrage programs.
  3. They will cancel trades pretty fast for following reason: out-of-range
    This happened to someone today during night session (YJZ2 @8150/8220).
    He received a call from his broker (on behalf of CBOT) a few minutes after the trade.
  4. The Minneapolis Grain Exchange is looking for market makers to add liquidity to their electronically traded Corn and Soybean Index futures contracts. Pretty much a ground floor proposition here.


    October 14, 2002</i>
    Minneapolis Grain Exchange Announces Addition of Market Maker In National Corn Index Futures</b>

    MINNEAPOLIS—The Minneapolis Grain Exchange (MGEX) announced today that beginning October 18, 2002, liquidity in National Corn Index (NCI) futures, traded at the Minneapolis Grain Exchange (MGEX), will be enhanced by the addition of a Market Maker.

    Market Maker programs are commonly used by futures exchanges to provide a baseline of liquidity in newly listed products, thus offering interested commercial and speculative audiences the assurance of market entry and exit at a reasonable bid/ask spread. Logistics of trading NCI futures are not altered because of the existence of a Market Maker. MGEX backs the financial integrity of the market through the margining process, as is always the case.
  5. bone


    Don't even think about it unless you have commercial/producer-level exposure/access to the underlying.
  6. Pabst


    Hey Bone,

    Us CBOT guys are certainly a well rounded bunch. How many of these prop traders can talk about global derivitives and ags!
  7. Could you explain this in more detail? What is it about market making operations which requires one to have the underlying?

    Is 'commercial/producer-level exposure/access to the underlying' the same as just buying the physical?

    The Corn Index futures is a cash settled product. How would that change what you were saying?
  8. bone


    I've traded energy for a big commercial, basis-traded fixed income, and my partner traded FX for a big commercial, so I'm speaking from experience, here. In an illiquid futures market any meaningful order flow coming in will be from a commercial interest who has information and a physical market presence that you don't have. You will not have the typical 50% order flow from locals to lean on. Doesn't really matter if the contract is fungible or not.

    For example, you could build a great arb model for plywood futures. Very thin market at many times. What happens if you're on the wrong side of Weyerhauser? You never saw them coming, there's no place to get out, and you know that they're not even close to being done. Ugly. Very Ugly.

    You built a great model for NYMEX electricity futures. Palo Verde delivery hub. Again, a very thin market at many times. You have no idea that Southern California Edison just lost a big power plant. Nobody knows that except SCE, because it just happened 5 minutes ago and these things don't make the news until the next day. SCE comes in and took out all of the offers in the book. You're stuck. Electricity just went from $59/MWhr to $259/MWhr.. REFCO's into you for $8 Million dollars. Really. No shit.

    Insider info is encouraged in the commodity markets. It's called hedging.

    You will not be able to arb effectively with them unless you buy a lumber mill, build a power plant, dig a natural gas well, mine for copper, or underwrite the U.S. automobile leases for BMW.
  9. <i>In two NCI futures contracts for which the Chicago Board of Trade (CBOT) has listed corn futures trading months, the MM will provide market depth of 20 contracts bid and 20 contracts offered at a spread of no more than one-cent per bushel during CBOT corn futures trading hours. When CBOT markets are closed, the NCI MM will provide market depth of 20 contracts bid and 20 contracts offered for two trading months, at a spread of no more than two-cents per bushel. These conditions will be met for the majority of NCI trading hours.</i>

    I take it from this statement that the MGEX MM is only required to supply 20 contracts, then he can stop. Is that how you read what this says?

    If the MM is well capitalized and is skilled enough to back away from the market he can make money off this and your max obligation is a net 20 contracts which you can offset in other markets.

    The Corn Index futures market is very thin as you say, but there are liquid markets you can arb off of.
  10. bone


    I was not referring specifically to the MGE Corn Index contract per se. Jana's original post that started this thread contemplated illiquid futures/options markets and arbitrage opportunities.

    I would consider a MM standing in the MGE pit flashing markets and orders to a desk clerk on a headset talking with another arb clerk at the CBOT Corn pit a mature and liquid futures arbitrage. Ditto for London and New York metals.

    I could not say the same for the Cheddar Cheese contract at the Merc.
    #10     Oct 19, 2002