Home Forums Main Forum Cross-Market Trading

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    #1351 |

    It seems like a lot of people trade multiple STIR markets. Although the main focus of this Forum is Eurodollar trading, you can take almost all of the concepts to any other STIR market – ER, L, BA, YE, etc. So I wanted to share my thinking on cross-market trading (trading between the various interest rate futures). I was originally thinking about starting Euribor coverage later this year, but another year of QE pretty much crushed that. There just aren’t as many curve-trading opportunities on a flat curve. But that doesn’t mean I can’t discuss ways of looking at cross-market opportunities. So while the opportunities may not appear right away, you can keep things on your radar.

    Before I proceed, I have the following disclaimer:
    I have not done much trading in terms of cross-market trades, for a number of reasons: (1) Mostly because the other interest rate markets didn’t have much liquidity past 8 or 12 contracts. So for you to trade the first 8 contracts, you need to have a reasonable (directional) view in that market. (2) As I always say, futures trading is a negative sum game (worse than a zero sum game because of brokerage). So if you have no advantage taking a view in a particular STIR, then you will probably lose money. Interest rate futures trading is one of those cases where being a jack of all trades is much worse than being a master of one. (3) Many STIRs trade in completely different time zones. So to keep up with what is going on in another country, you need to work really long and awkward hours. Again, going back to negative sum game and competitive advantage, how are you going to outperform someone who is actually watching the other market full-time, when you are asleep? (4) There is no universal close. So pieces of your trade will settle at different times, so your P&L could be all over the place. Some shops may attempt to use a non-standard close for one or more markets, to get more uniformity. However, I think this is rare. This also makes looking at cross-market historicals much more difficult because there will be a lot more noise.

    That having been said, all you really need is a few really good opportunities during the course of an entire year to more than make up for the time and effort you spend in looking at cross-market trades. IF Bill Gross just looked at US rates, he would never find all of his “shorts of a lifetime.”

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