eurex equity spreading tactics

7/25/2019 Eurex Equity Spreading Tactics

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Name, place, date

Techniques and Methodologies for

Spread Trading Eurex Equity IndexFutures

April 2009


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Name, place, date 2

Objectives

Presentation Focuses on Structure and Strategy

Create, Trade, and Manage Spreads with the DJ Euro Stoxx 5 and Dax !ndex"utures

!denti#$ and %nderstand the Metrics %ni&ue to !mplied Spread Trading

Strategies and Tactics #or Trading !mplied Spreads


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Name, place, date '

Objectives

Create, Trade, and Manage Spreadswith the DJ Euro Stoxx 5 and Dax!ndex "utures

(ene#its to Discretionar$ Traders (ac)ground o# products *DJ Euro Stoxx 5, Dax, ES+

Dual "actor and Multi"actor Spreads

-al) Through .rocess o# (uilding a Spread

Contract /atios

Charting o# Spread


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Name, place, date 0

Identify and Understand the Structural Metrics

Unique to Implied Spread Trading

Dealing with Mishedges1.artial "ills1Doule "ills

!denti#$ing -or)3rounds #or Excessi4euoting1Messaging

Determining .a$up Tic)s

-or)ing 6ne 7eg or Multiple 7egs

Spread Trading So#tware


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Name, place, date 5

Strategies for Trading Spreads

3lpha 8enerating Strategies

Trade "actor 3nal$sis


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Name, place, date 9

ac!ground

John Netto

Chie# !n4estment Strategist, Net(lac) Capital, CT3

3uthor, :6ne Shot ; 6ne ill, 20+

.resident, M' Capital, 77C *!ntroducing (ro)erage "irm+

34id .o)er .la$er and Sports >andicapper

Spea) Japanese and Chinese

7i4e in N?C and 7as @egas

Nine ?ears in %S Marines


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Name, place, date A

"reate# Trade# and Manage Spreads

(ene#its #or a Discretionar$ Trader

-atch Mone$ "lows in Mar)et

8ain Sense o# /elati4e Strength

Trac) @olatilit$

!nsight to /is) 34ersion1/is) 3ppetite

(ene#it to Currenc$ Traders with Countr$ Speci#ic News

%pward Sloping ?ield Cur4e

-idening Contango or "lattening "orward Cur4e


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Name, place, date


B .resentation will #ocus on spreading Dax !ndex "utures *"D3+

' 8erman stoc)s

Dow Jones Euro Stoxx 5 *"ES+

"rance *+, 8erman$ *'+, !tal$ *9+, Spain *9+,Netherlands *0+, (elgium *+, and "inland *+

(an)s, %tilities, Telco

S F . 5 "utures *ES+

-idel$ #ollowed %S E&uit$ enchmar)


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Name, place, date

Ticker Name% Weight in theIndex

Shares in theIndex

DAX DAX

ADS GY Equity Adidas AG 1.257489 11.87955

ALV GY Equity Allianz SE 7.719982 27.81189

BAS GY Equity BASF SE 5.843517 5.3838

BAY GY Equity Bay!" AG .844599 4.9218

B#$ GY Equity Bay!"is%&! #'t'"!n $!"(! AG 2.)48232 19.7341

BE* GY Equity B!i!"sd'"+ AG ).59985 5.))448

,B- GY Equity ,'!"z/an( AG ).8245) 4).7389

DA* GY Equity Dail!" AG 5.471115 53.71)3

DB- GY Equity D!uts%&! Ban( AG 5.493751 34.5))22

DB1 GY Equity D!uts%&! B'!"s! AG 2.358737 11.97)8

L0A GY Equity D!uts%&! Lu+t&ansa AG 1.)49882 28.11193

D$ GY Equity D!uts%&! 'st AG 1.934299 51.58235

DE GY Equity D!uts%&! !l!(' AG .83274 182.8181EA GY Equity E. AG 9.9)91 111.952)5

F#E GY Equity F"!s!nius #!di%al ,a"! AG ,' -GaA 1.3)8148 11.4994

F6E3 GY Equity F"!s!nius SE ).894 4.941

061 GY Equity 0ann'!" 6u!%(!"si%&!"un AG ).3743 3.8533

0E3 GY Equity 0!n(!l AG ,' -GaA ).83237 1).937)8

SDF GY Equity -S AG 1.32359 7.552

L* GY Equity Lind! AG 2.232391 1).34325

#A GY Equity #A AG 1.)1818 .3891

#6- GY Equity #!"%( -GaA 1.)3258 4.)5831#E GY Equity #!t"' AG ).777938 .79)7

#:V2 GY Equity #u!n%&!n!" 6u!%(!"si%&!"uns AG 4.7)2324 12.)3721

6$E GY Equity 6$E AG 5.57428 25.)1387

S;G GY Equity Salzitt!" AG ).51455 2.34341

SA GY Equity SA AG 5.78744 51.48)1

S*E GY Equity Si!!ns AG 9.2)534 5).)5453

-A GY Equity &yss!n-"u


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Name, place, date

(ac)ground o# .roducts ; DJ Euro Stoxx Components


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Name, place, date

(ac)ground o# .roducts ; DJ Euro Stoxx Components


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Name, place, date 2

Overlapping Stoc!s et&een $a% and 'uro Sto%% ()

ALV GY Equity Allianz SE

BAS GY Equity BASF SE

BAY GY Equity Bay!" AG

DA* GY Equity Dail!" AG

DB- GY Equity D!uts%&! Ban( AG

DB1 GY Equity D!uts%&! B'!"s! AG

DE GY Equity D!uts%&! !l!(' AG

EA GY Equity E. AG

#:V2 GY Equity #u!n%&!n!" 6u!%(!"si%&!"uns AG

6$E GY Equity 6$E AG

SA GY Equity SA AG

S*E GY Equity Si!!ns AG

V$ GY Equity V'l(s=a!n AG


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Name, place, date '

"omponents of $* 'uro Sto%% () and $a% Inde%


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Dual "actor and Multi"actor Spreads

Dual "actor Spread

Comprised o# two legs

7ong "ES 1 Short "D3

Multi"actor Spread

Comprised o# three or more legs

7ong ES, Short "ES and Short "D3


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Name, place, date 5


-al) through process o# uilding a spread

!ndependent 7eg1Dependent 7eg

!denti#$ 7i&uid 7eg1illi&uid 7eg

E&ualiGe1NormaliGe the Spread

Determine Contract /atios


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Name, place, date 9

Identifying the Independent+$ependent ,egs

!ndependent *.rimar$+ 7eg *"ES+

.rice o# implied spread is ased on this leg

-hen u$ing spread, going long this leg

-hen selling spread, going short this leg

Dependent *Secondar$+ 7eg *"D3+

-hen u$ing the spread, going short this leg

-hen selling the spread, going long this leg


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Name, place, date A

Identify illiquid+,iquid ,egs of Spread

B!ntermar)et spreads time o# da$ is )e$

"ollow pools o# li&uidit$ and 4olatilit$ around the gloe

' 3M Central Time, more li&uidit$ in Eurex

.M Central Time, more li&uidit$ in %S Exchanges

B!ntramar)et spreads *all Eurex products+ Should use more illi&uid leg to wor) order

EHgH "ES1"D3 ; "ES more li&uid leg 1 "D3 is illi&uid leg


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Name, place, date

'quali-e or .ormali-e the Spread

B uanti#$ing the relationship etween two productsto create s$nthetic 4alue .roper normaliGation allows #or trader to accuratel$ assess the relati4e

strength etween the independent and dependant legsH

NormaliGation ratios are input into spread trading so#tware to chartrelationship

' l F'S0+F$10 S d


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Name, place, date

'%ample / F'S0+F$10 Spread


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Name, place, date


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Name, place, date 2

'%ample / FS'0+F$10 Spread


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Name, place, date 22


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Name, place, date


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Chart o# Spread ; "ES"D3


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$* 'uro Sto%% ()# $a%# 'S# .2# TF' 3Mini 4ussell5

6 ,ast 7) "alendar 387 Trading5 $ays 6

9689 "ontract 4ange 3Point+Tic!s5 4ange 3"urrency5 4ange 3US $ollars5

Totals T"E 22 22 22

N 02 I0 I0

ES 2A '5 '5

"D3 'I '05 05I9

"ES A' A'' 5


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Contract /atios

7ead 7eg ES "D3 "ES N

"D3 21A N13 21 15

ES N13 A12 A1 21'

"ES 1A 12 N13 519


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Name, place, date 2A

Structural Metrics Unique to Implied Spread Trading

Dealing with Doule "ills1Mishedges1.artial "ills

Doule "ills ; 3s a result o# changing orders 1t exchangeand trading so#tware, ris) o# multiple #ills and either short orlong position in mar)et ta)es place

>ow do doule #ills happen -or)ing oth legs in an attemptto maintain &ueue pre#erence

.remium placed on ser4er location, speed o# transmissions

Chec) message turnaround time

ExampleK -or)ing oth legs o# 7ong "ES1"D3 spread .ear simultaneous fills ta!e place of long : F'S0 and short 8 F$10

Spreading soft&are &ill send hedge orders of corresponding leg# in essenceselling 8 more F$10 and buying : more F'S0

The result can be long ;< F'S0# short 9 F$10 or some&here in bet&een


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Name, place, date

Mishedges+=ung ,egs

B -or)ing a spread and ha4ing one leg #illedand other leg un#illed

B ExampleK -or)ing long x A "ES1ES

spread Filled on long ;) of F'S0# &hile short > of 'S is still &or!ing =ang ris! larger for more volatile mar!ets or ne&s events

1ddresses issue of payup tic! logic

"ontract ratio logic per hang ris!


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Name, place, date

Partial Fills

.artial "ills ; -hile wor)ing a spread, onl$ part o# the leg is#illed lea4ing $ou 4ulnerale to s$stemic ris)

!# partial ta)es place in general mar)et trend, usuall$ more#lexile to let it wor)

!# partial ta)es place against trend, more aggressi4e to #latten

outB Example ; -or)ing a long x 2 "ES1"D3 spread and '

contract u$s on "ES leg are #illedH .ot enough to hedge out &ith ; big $a%# but still mar!et ris!

Solutions 1ccept the ris! and stay long

"lose position &ith 7 lot sell on F'S0

=edge out &ith 'S


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Name, place, date '


!denti#$ing -or)3rounds #or Excessi4e uoting1Messaging

Excessi4e messaging can slow s$stem per#ormance1negati4el$ impactsmar)et participants1increases capacit$ re&uirements and costs

3 message ; an$ 6rder, Modi#ication, or Cancel #or a product

%nderstanding the @olume /atio

Di4iding total numer o# messages $ total executed 4olume

Notices and Surcharges

"irm is #ined L2, per occurrence as technolog$ surcharge and potentiall$more i# issue occurs consistentl$

.otential Solutions

Trader 3utoSpreader ; Smart uote 7imits C8 ; Nina Mode which wor)s orders later

"CM ; !# "CM *Class 3 #irm+ is doing lots o# 4olume it can help o##setexcessi4e messaging

/e#erenceK

Eurex Circular "eruar$ , 2 :3dustment o# the 3rchitecture Throttle=

httpK11wwwHcmegroupHcom1gloex1#iles1CMEMessaging.olic$Hpd#


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Name, place, date '

Structural Metrics Unique to Implied Spread

Trading


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Name, place, date '2


6 $etermining Payup Tic!s

-h$ are .a$up Tic)s So !mportant Executing strateg$ is pinned against #ills at implied prices

>igh 4olume game and slippage can signi#icantl$ detract #rome##icac$ o# strateg$

Spreads DonOt >appen in @acuum

Same d$namics which create opportunities create ostacles

Strategies ; Set Threshold #or max slippage #or each transaction

Set 7imit plus

Set Trailing plus

-or) mar)et on side o# direction $ou thin) mar)et is headed EHgHH !# wor)ing 7ong "ES"D3 spread and mar)et is rall$ing,

wor) long leg *"ES+ and use short leg with no pa$up tic)sH iHeHget hung long in rising mar)et, not hung short


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Name, place, date ''


"actors in -or)ing 6ne 7eg or Multiple 7egs

7i&uidit$

Deeper mar)ets ma)e multiple leg &uoting potentiall$ moreene#icial as &ueue pre#erence materiall$ impactsper#ormance o# acti4e trading

@olatilit$

More 4olatile the mar)et, greater ris) #or mishedging

Messaging1uoting 7imits


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ac!ground

.atric) S >emminger

>ead E&uit$ !ndex 1 Commodit$ Trader at NetCap 3d4isors

I $ears Experience Managing .roprietar$ .ort#olios

Experience trading

E&uit$ !ndexes

Commodities *6il, .roducts, 8rains, Meats+

Currencies *Spot, "utures+

Treasuries *"utures, Cash+


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1lpha ?enerating Spread Strategies

Eurex 4sH Eurex and NonEurex 4sH Eurex Spreads

"ES 4sH "D3

ES 4sH "D3

ES 4sH "ES

Trade "actor 3nal$sis .re ; Trade 3nal$sis

!denti#$ing 3reas o# @alue


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Name, place, date

Spread '%amples

F'S0 vs@ F$10

'9


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Name, place, date

'S vs@ F$10

'A


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Name, place, date

'S vs@ F'S0

'I


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Name, place, date

'S + F'S0 + $10 Fly

'


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Name, place, date

Trade Factor 1nalysis

NormaliGing, wh$

Cohesion 1 relationship

/eplication

NormaliGation "actors

!nstrument Tic) @alue

!nstrument Notional @alue

!nstrument (ase Currenc$

!nstrument >istorical @olatilit$

9 Da$ ' Da$

0


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Name, place, date

Trade Factor 1nalysis

(enchmar)ing ES

8loal E&uit$ !ndex (enchmar), the Standard

.ro4ides #ocus

Manage Expectations 1 .er#ormance

Most 7i&uid

ES ; M3 P 2H5 MM per da$

"ES ; M3 P H5 MM per da$

Currenc$ Component

!nstrument (ase Currenc$

/esidual (alance Strateg$ ; !ntrada$ 1 End o# Da$ >edge w1 "uture

Exchange #or .h$sical *E".+

Spot Transaction

0


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Name, place, date

Pre6Trade 1nalysis 6 AISS

(eta uic) and Simple

8auging .rice "luctuations

-here is the /is) 1 @olatilit$ Time

(enchmar) /elationship etween Dependent F

!ndependent

7i&uidit$

02


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Name, place, date

Pre6Trade 1nalysis

Time o# Da$ 3nal$sis

(e 3ware o# 6pen and Close Times

6rganiGe Da$

Time (rac)ets Separate (rac)ets

Time o# Da$ #or 6pportunities

.roailities

0'


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Name, place, date

Pre6Trade 1nalysis

7ong Term Standard De4iation 3nal$sis

(ollinger (ands

Q1 P Momentum

Q12H5 Distance (etween (ands

Slope o# (ands

>istorical E##ecti4eness

Coast to Coast

00


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Name, place, date

ollinger and '%ample

05


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Name, place, date

Mar!et Profile

7ong Term Standard De4iation 3nal$sis

Time .rice 6pportunities

.oint o# Control

@alue 3rea >igh *@3>+ @alue 3rea 7ow *@37+

09


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Name, place, date

TechnicalBs

Trend lines

Doule Tops 1 (ottoms

"ionacci /etracements

Slow Stochastic Complimentar$ Mar)ets

Top Down 3pproach

0I


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Name, place, date

Technicals

Trend lines + $ouble Tops + $ouble ottoms

0


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Name, place, date

TechnicalBs

Fibonacci 4etracements

5


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Name, place, date

TechnicalBs

Fibonacci 4etracements

5


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Name, place, date

TechnicalBs

Slo& Stochastic 3SStoch5

52


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Name, place, date

TechnicalBs

"omplimentary Mar!ets

5'

(e CogniGant o# Constituents

!denti#$ Sectors %nder 1 6ut .er#orming

-hat mar)ets are in the news

Currencies E%/%SD

8(.%SD

E%/J.?

(e aware o# Constituents in the Commodit$ !ndustr$

6il 8old


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Name, place, date

TechnicalBs

Top $o&n 1pproach

50

3nchor Charts

Dail$ 1 ' min 1 5 min

Trade on the side o# the mar)et

Contrarian positions Managing /is)

Ta)e a loser, 6pportunit$ Cost

Tape /ead 1 "eel


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Name, place, date

"ontact Information

B John Netto

B nettoRnetlac)capitalHcom

B 22'595

B wwwHoso)tradingHcom

B wwwHnetlac)capitalHcom

B wwwHm'capitalHcom

B Capital allocations, consulting, outi&uero)erage ser4ices, sellside 1 u$sidecon#erences, trader education
mailto:[email protected]://www.osoktrading.com/http://www.netblackcapital.com/http://www.m3capital.com/http://www.m3capital.com/http://www.netblackcapital.com/http://www.osoktrading.com/mailto:[email protected]


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Name, place, date

"ontact Information

.atric) S >emminger

phemRnetcapHcom

9'HA2'H0A'


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Eurex 2

Deutsche (rse 38 *D(38+, Clearstream (an)ing 38 *Clearstream+, Eurex "ran)#urt 38, Eurex Clearing 38 *Eurex Clearing+ as well as Eurex (onds 8m> *Eurex (onds+ and Eurex /epo8m> *Eurex /epo+ are corporate entities and are registered under 8erman lawH Eurex UVrich 38 is a corporate entit$ and is registered under Swiss lawH Clearstream (an)ing SH3H is acorporate entit$ and is registered under 7uxemourg lawH %HSH Exchange >oldings, !ncH and !nternational Securities Exchange >oldings, !ncH *!SE+ are corporate entities and are registeredunder %HSH 3merican lawH Eurex "ran)#urt 38 *Eurex+ is the administrating and operating institution o# Eurex DeutschlandH Eurex Deutschland and Eurex UVrich 38 are in the #ollowing re#erredto as the :Eurex Exchanges=H

3ll intellectual propert$, proprietar$ and other rights and interests in this pulication and the suect matter hereo# *other than certain trademar)s and ser4ice mar)s listed elow+ are owned $D(38 and its a##iliates and susidiaries including, without limitation, all patent, registered design, cop$right, trademar) and ser4ice mar) rightsH -hile reasonale care has een ta)en in thepreparation o# this pulication to pro4ide details that are accurate and not misleading at the time o# pulication D(38, Clearstream, Eurex, Eurex Clearing, Eurex (onds, Eurex /epo as well asthe Eurex Exchanges and their respecti4e ser4ants and agents *a+ do not ma)e an$ representations or warranties regarding the in#ormation contained herein, whether express or implied,including without limitation an$ implied warrant$ o# merchantailit$ or #itness #or a particular purpose or an$ warrant$ with respect to the accurac$, correctness, &ualit$, completeness ortimeliness o# such in#ormation, and *+ shall not e responsile or liale #or an$ third part$Os use o# an$ in#ormation contained herein under an$ circumstances, including, without limitation, inconnection with actual trading or otherwise or #or an$ errors or omissions contained in this pulicationH

This pulication is pulished #or in#ormation purposes onl$ and shall not constitute in4estment ad4ice respecti4el$ does not constitute an o##er, solicitation or recommendation to ac&uire ordispose o# an$ in4estment or to engage in an$ other transactionH This pulication is not intended #or solicitation purposes ut onl$ #or use as general in#ormationH 3ll descriptions, examples andcalculations contained in this pulication are #or illustrati4e purposes onl$H

Eurex and Eurex Clearing o##er ser4ices directl$ to memers o# the Eurex exchanges respecti4el$ to clearing memers o# Eurex ClearingH Those who desire to trade an$ products a4ailale onthe Eurex mar)et or who desire to o##er and sell an$ such products to others or who desire to possess a clearing license o# Eurex Clearing in order to participate in the clearing process pro4ided$ Eurex Clearing, should consider legal and regulator$ re&uirements o# those urisdictions rele4ant to them, as well as the ris)s associated with such products, e#ore doing soH

Eurex deri4ati4es *other than Dow Jones E%/6 ST6 5W !ndex "utures contracts, Dow Jones E%/6 ST6W Select Di4idend ' !ndex "utures contracts, Dow Jones ST6 5W !ndex

"utures contracts, Dow Jones ST6W 9 !ndex "utures contracts, Dow Jones ST6W 7arge1Mid1Small 2 !ndex "utures contracts, Dow Jones E%/6 ST6W (an)s "utures contracts,Dow Jones ST6W 9 (an)s1!ndustrial 8oods F Ser4ices1!nsurance1Media1.ersonal F >ousehold 8oods1Tra4el F 7eisure1%tilities "utures contracts, Dow Jones 8loal Titans 5 !ndexSM"utures contracts, D3W "utures contracts, MD3W "utures contracts, TecD3W "utures contracts, SM!MW "utures contracts, S7! Swiss 7eader !ndexW "utures contracts, /DxtW %SD ;/D Extended !ndex "utures contracts, Eurex in#lation deri4ati4es, Eurex commodit$ deri4ati4es, and Eurex interest rate deri4ati4es+ are currentl$ not a4ailale #or o##er, sale or trading in the%nited States or $ %nited States personsH

Trademar)s and Ser4ice Mar)s

(uxlW, D3W, Di4D3W, eHrexxW, EurexW, Eurex (ondsW, Eurex /epoW, Euro 8C .oolingW, Eurex Strateg$ -iGardSM, ET"W, "D3W, "-(W, MD3W, 6D3W, TecD3W, @D3W,@D3NE-W, etraW and T" Exchange Traded "undsW are registered trademar)s o# D(38H

The ser4ice mar) MSC! /ussia is the exclusi4e propert$ o# Morgan Stanle$ Capital !nternational, !ncH

/DxtW is a registered trademar) o# -iener (rse 38 *@ienna Stoc) Exchange+H

iTraxxW is a registered trademar) o# !nternational !ndex Compan$ 7imited *!!C+ and has een licensed #or the use $ EurexH !!C does not appro4e, endorse or recommend Eurex or iTraxxWEurope 5$ear !ndex "utures, iTraxxW Europe >i@ol 5$ear !ndex "utures and iTraxxW Europe Crosso4er 5$ear !ndex "uturesH

Eurex is solel$ responsile #or the creation o# the Eurex iTraxxW Credit "utures contracts, their trading and mar)et sur4eillanceH !SD3W neither sponsors nor endorses the productOs useH !SD3W

is a registered trademar) o# the !nternational Swaps and Deri4ati4es 3ssociation, !ncH!.DW %< 3nnual 3ll .ropert$ !ndex is a registered trademar) o# !n4estment .ropert$ Dataan) 7tdH *!.D and has een licensed #or the use $ Eurex #or deri4ati4esH

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ST6W, Dow Jones ST6W 9 !ndex, Dow Jones ST6W 7arge 2 !ndex, Dow Jones ST6W Mid 2 !ndex, Dow Jones ST6W Small 2 !ndex, Dow Jones ST6W TM! !ndex,@ST6W !ndex, Dow Jones E%/6 ST6 5W D@., Dow Jones E%/6 ST6W Select Di4idend ' !ndex, Dow Jones E%/6 ST6W1ST6W 9 Sector !ndexes as well as the DowJones E%/6 ST6 5W !ndex and Dow Jones ST6 5W !ndex are ser4ice mar)s o# ST6 7tdH and1or Dow Jones F Compan$, !ncH

Dow Jones, Dow Jones 8loal Titans 5 !ndexSM and Dow Jones Sector Titans !ndexesSM are ser4ice mar)s o# Dow Jones F Compan$, !ncH The deri4ati4es ased on these indexes are notsponsored, endorsed, sold or promoted $ ST6 7tdH or Dow Jones F Compan$, !ncH, and neither part$ ma)es an$ representation regarding the ad4isailit$ o# trading or o# in4esting in suchproductsH

The names o# other companies and third part$ products ma$ e trademar)s or ser4ice mar)s o# their respecti4e ownersH

eurex equity spreading tactics

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