" exchange supported implieds " ... It means that your bid or offer will get taken internally by the CME order-matching engine to satisfy spread orders for crack spreads and calendar spreads - it's a big problem for this particular strategy in the Nymex Heating Oil and RBOB gasoline markets because the exchange will take you out faster and with greater efficiency than any competitive trader. It's going to be a big problem for ZN because those bids and offers flip way too fast for you to get in early enough in the queue to scratch it after you get filled - those markets are highly automated by GETCO and a few other firms. I trade those markets every day, I use automation from time to time, and I can't see the strategy working for ZN.
Well, the crack spread and calendar spread volume is derived from firm (non-contingent) orders in the flat price futures, and for HO and RBOB that is too significant to make those particular markets 'flippable' without getting your ass run over by the exchange's internal spread order matching engine. In other words, your futures orders in HO and RBOB will get used by the exchange to match up with CL futures for the crack spread traders like me. Any second month futures orders get matched up with the front month for the calendar spread orders. This is all done internally, and you will not be able to game it. Compare the spread volume to the futures volume - that factor combined with the fact that the market order books are stacked with one and two lots makes it an untenable strategy. Buying bids and selling offers in flat price energy futures is not a positive risk/reward strategy - this is a 28% vol market, not a 3% vol STIR fixed-income market. If you still disagree, then by all means please avail yourself .
"This is all done internally, and you will not be able to game it. Compare the spread volume to the futures volume - that factor combined with the fact that the market order books are stacked with one and two lots makes it an untenable strategy. " Bone this is something I do not understand. With high volume, why (in the energy markets) is the order book so thin and the bid/ask so unstable? My guess had been the tick size is too small for the contract characteristics (Of course that is from my perspective, a directional trader who would prefer to be able to hit a bid or offer with size and just get the trade over with). Is there something else too it?
1Pro: Sunshine was specifically referring to the RBOB and HO Nymex markets: "I am looking into this strategy , maybe with a wide spread markets like gasoline or heating oil ... " And yes, flipping that market would be quite impossible. The actual order book is stacked with one lots. Now, to be fair, it is quite possible to Iceberg orders and trade a bit of volume at a particular price, but I'm speaking more to the viability of a strategy. To make this an effective strategy, you need to be able to bid or offer early in a FIFO order matching queue, and volatility will kill you. The lower maturity fixed income markets are much more amenable to this strategy.
There are four criteria that have to be met to make this strategy pay off consistently: 1. Has to be a very low volatility market. Think STIR low. If the market consistently trades through the bid or offer then of course the strategy is not viable. 2. You have to be really early in the order queue timestamp for FIFO markets - not only for the entry but for the exit orders. Your orders can not be conditional orders - which rules out most automated order generation. If you're running automation, it has to be approved by the exchange, and those orders are tagged as 'conditional' by the exchange's own internal order matching engine. 3. For Pro-Rata order matching algorithm markets, you have to have the capitalization and FCM clearing authorizations required to enable the trader to place very large limit orders. Traders will literally bid 1,000 contracts to get 50 or whatever the split is. The other side of the blade is obvious with this double-edged sword. But I see alot of Chicago prop traders doing it. 4. As with all order book gaming strategies, your message-to-fill ratio has to comply with exchange policies.
Maybe this will not work on gasoline because of high volatility , but STIR and treasuries is not the answer , these markets is very crowded and very difficult to compete in , i am not a machine , i need something else so i as an individual trader can scalp manually
Important information http://www.elitetrader.com/vb//showthread.php?threadid=190985 http://www.cmegroup.com/globex/files/PriceBanding.pdf Matching Algos : http://www.cmegroup.com/globex/introduction/