eurex spread trading equity index futures master

Name, place, date

Techniques and Methodologies for Spread Trading Eurex Equity Index

Futures

April 2009

Name, place, date 2

Objectives

Presentation Focuses on Structure and Strategy●Create, Trade, and Manage Spreads with the DJ Euro Stoxx 50 and Dax Index Futures

●Identify and Understand the Metrics Unique to Implied Spread Trading

●Strategies and Tactics for Trading Implied Spreads

Name, place, date 3

Objectives

●Create, Trade, and Manage Spreads with the DJ Euro Stoxx 50 and Dax Index Futures

● Benefits to Discretionary Traders

● Background of products (DJ Euro Stoxx 50, Dax, ES)

● Dual Factor and Multi-Factor Spreads

● Walk Through Process of Building a Spread

● Contract Ratios

● Charting of Spread

Name, place, date 4

Identify and Understand the Structural Metrics Unique to Implied Spread Trading

●Dealing with Mishedges/Partial Fills/Double Fills

●Identifying Work-Arounds for Excessive Quoting/Messaging

●Determining Payup Ticks

●Working One Leg or Multiple Legs

●Spread Trading Software

Name, place, date 5

Strategies for Trading Spreads

● Alpha Generating Strategies

● Trade Factor Analysis

Name, place, date 6

Background

John Netto

●Chief Investment Strategist, NetBlack Capital, CTA

●Author, “One Shot – One Kill Trading” (McGraw-Hill, 2004)

●President, M3 Capital, LLC (Introducing Brokerage Firm)

●Avid Poker Player and Sports Handicapper

●Speak Japanese and Chinese

●Live in NYC and Las Vegas

●Nine Years in US Marines

Name, place, date 7

Create, Trade, and Manage SpreadsBenefits for a Discretionary Trader

●Watch Money Flows in Market

●Gain Sense of Relative Strength

●Track Volatility

●Insight to Risk Aversion/Risk Appetite

●Benefit to Currency Traders with Country Specific News

●Upward Sloping Yield Curve

●Widening Contango or Flattening Forward Curve

Name, place, date

Create, Trade, and Manage Spreads

• Presentation will focus on spreading ● Dax Index Futures (FDAX)

- 30 German stocks

● Dow Jones Euro Stoxx 50 (FESX)- France (19), Germany (13), Italy (6), Spain (6),

Netherlands (4), Belgium (1), and Finland (1) - Banks, Utilities, Telco

● S & P 500 Futures (ES)- Widely followed US Equity benchmark

Name, place, date 9

Ticker Name % Weight in the Index Shares in the Index

DAX DAXADS GY Equity Adidas AG 1.257489 11.87955ALV GY Equity Allianz SE 7.719982 27.81189BAS GY Equity BASF SE 5.843517 56.38368BAY GY Equity Bayer AG 6.844599 46.92168BMW GY Equity Bayerische Motoren Werke AG 2.048232 19.73416BEI GY Equity Beiersdorf AG 0.599685 5.00448CBK GY Equity Commerzbank AG 0.824506 40.73869DAI GY Equity Daimler AG 5.471115 53.76103DBK GY Equity Deutsche Bank AG 5.493751 34.50022DB1 GY Equity Deutsche Boerse AG 2.358737 11.97068LHA GY Equity Deutsche Lufthansa AG 1.049882 28.11193DPW GY Equity Deutsche Post AG 1.934299 51.58235DTE GY Equity Deutsche Telekom AG 6.83274 182.86181EOAN GY Equity E.ON AG 9.90961 111.95205FME GY Equity Fresenius Medical Care AG & Co KGaA 1.308148 11.4994FRE3 GY Equity Fresenius SE 0.686946 4.94616HNR1 GY Equity Hannover Rueckversicherung AG 0.366743 3.68533HEN3 GY Equity Henkel AG & Co KGaA 0.832376 10.93708SDF GY Equity K+S AG 1.323569 7.55626LIN GY Equity Linde AG 2.232391 10.34325MAN GY Equity MAN AG 1.018618 6.38916MRK GY Equity Merck KGaA 1.032586 4.05831MEO GY Equity Metro AG 0.777938 6.79067MUV2 GY Equity Muenchener Rueckversicherungs AG 4.702324 12.03721RWE GY Equity RWE AG 5.576428 25.01387SZG GY Equity Salzgitter AG 0.51455 2.34341SAP GY Equity SAP AG 5.787464 51.4801SIE GY Equity Siemens AG 9.205364 50.05453TKA GY Equity ThyssenKrupp AG 1.427811 20.51034VOW GY Equity Volkswagen AG 5.018599 5.29206

Components of Dax Index

Name, place, date 10

Background of Products – DJ Euro Stoxx Components


Background of Products – DJ Euro Stoxx Components


Overlapping Stocks Between Dax and Euro Stoxx 50

ALV GY Equity Allianz SE

BAS GY Equity BASF SE

BAY GY Equity Bayer AG

DAI GY Equity Daimler AG

DBK GY Equity Deutsche Bank AG

DB1 GY Equity Deutsche Boerse AG

DTE GY Equity Deutsche Telekom AG

EOAN GY Equity E.ON AG

MUV2 GY Equity Muenchener Rueckversicherungs AG

RWE GY Equity RWE AG

SAP GY Equity SAP AG

SIE GY Equity Siemens AG

VOW GY Equity Volkswagen AG


Components of DJ Euro Stoxx 50 and Dax Index



Dual Factor and Multi-Factor Spreads

●Dual Factor Spread● Comprised of two legs

● Long FESX / Short FDAX

●Multi-Factor Spread● Comprised of three or more legs

● Long ES, Short FESX and Short FDAX



Walk through process of building a spread

●Independent Leg/Dependent Leg

●Identify Liquid Leg/illiquid Leg

●Equalize/Normalize the Spread

●Determine Contract Ratios


Identifying the Independent/Dependent Legs

●Independent (Primary) Leg (FESX)● Price of implied spread is based on this leg● When buying spread, going long this leg● When selling spread, going short this leg

●Dependent (Secondary) Leg (FDAX)● When buying the spread, going short this leg● When selling the spread, going long this leg


Identify illiquid/Liquid Legs of Spread

•Intermarket spreads - time of day is key

● Follow pools of liquidity and volatility around the globe

● 3 AM Central Time, more liquidity in Eurex

● 1 PM Central Time, more liquidity in US Exchanges

•Intramarket spreads (all Eurex products) ● Should use more illiquid leg to work order

● E.g. FESX/FDAX – FESX more liquid leg / FDAX is illiquid leg

Name, place, date

Equalize or Normalize the Spread

• Quantifying the relationship between two products to create synthetic value● Proper normalization allows for trader to accurately assess the relative

strength between the independent and dependant legs.● Normalization ratios are input into spread trading software to chart

relationship


Example : FESX/FDAX Spread

Name, place, date


Example : FSEX/FDAX Spread

Name, place, date


Create, Trade, and Manage SpreadsChart of Spread – FESX-FDAX


DJ Euro Stoxx 50, Dax, ES, NQ, TFE (Mini Russell)- Last 30 Calendar (23 Trading) Days -

4-24 Contract Range (Point/Ticks) Range (Currency) Range (US Dollars)

Totals TFE 202 2020 2020

NQ 42 840 840

ES 27 1350 1350

FDAX 138 3450 4586

FESX 73 733 995


Create, Trade, and Manage SpreadsContract Ratios

Lead Leg ES FDAX FESX NQ

FDAX 2/7 N/A 2/9 1/5

ES N/A 7/2 7/10 2/3

FESX 10/7 9/2 N/A 5/6


Structural Metrics Unique to Implied Spread Trading

Dealing with Double Fills/Mishedges/Partial Fills

●Double Fills – As a result of changing orders b/t exchange and trading software, risk of multiple fills and either short or long position in market takes place

● How do double fills happen? Working both legs in an attempt to maintain queue preference

● Premium placed on server location, speed of transmissions● Check message turnaround time

●Example: Working both legs of Long FESX/FDAX spread● Near simultaneous fills take place of long 9 FESX and short 2 FDAX● Spreading software will send hedge orders of corresponding leg, in essence

selling 2 more FDAX and buying 9 more FESX● The result can be long 18 FESX, short 4 FDAX or somewhere in between

Name, place, date

Mishedges/Hung Legs

• Working a spread and having one leg filled and other leg unfilled

• Example: Working long 10 x 7 FESX/ES spread

● Filled on long 10 of FESX, while short 7 of ES is still working● Hang risk larger for more volatile markets or news events● Addresses issue of payup tick logic● Contract ratio logic per hang risk

Name, place, date

Partial Fills

Partial Fills – While working a spread, only part of the leg is filled leaving you vulnerable to systemic risk● If partial takes place in general market trend, usually more

flexible to let it work● If partial takes place against trend, more aggressive to flatten

out

• Example – Working a long 9 x 2 FESX/FDAX spread and 3 contract buys on FESX leg are filled.

● Not enough to hedge out with 1 big Dax, but still market risk● Solutions

- Accept the risk and stay long- Close position with 3 lot sell on FESX - Hedge out with ES



●Identifying Work-Arounds for Excessive Quoting/Messaging● Excessive messaging can slow system performance/negatively impacts

market participants/increases capacity requirements and costs

●A message – any Order, Modification, or Cancel for a product

●Understanding the Volume Ratio● Dividing total number of messages by total executed volume

●Notices and Surcharges● Firm is fined $2,000 per occurrence as technology surcharge and potentially

more if issue occurs consistently

●Potential Solutions● XTrader AutoSpreader – Smart Quote Limits● CQG – Ninja Mode which works orders later● FCM – If FCM (Class A firm) is doing lots of volume it can help offset

excessive messaging

●Reference:●Eurex Circular February 9, 2009 “Adjustment of the Architecture Throttle…”●http://www.cmegroup.com/globex/files/CMEMessagingPolicy.pdf


Structural Metrics Unique to Implied Spread Trading- Determining Payup Ticks

●Why are Payup Ticks So Important?● Executing strategy is pinned against fills at implied prices● High volume game and slippage can significantly detract from

efficacy of strategy

●Spreads Don’t Happen in Vacuum● Same dynamics which create opportunities create obstacles

●Strategies –● Set Threshold for max slippage for each transaction● Set Limit plus● Set Trailing plus● Work market on side of direction you think market is headed

- E.g.. If working Long FESX-FDAX spread and market is rallying, work long leg (FESX) and use short leg with no payup ticks. i.e. get hung long in rising market, not hung short…



Factors in Working One Leg or Multiple Legs

●Liquidity● Deeper markets make multiple leg quoting potentially more

beneficial as queue preference materially impacts performance of active trading

●Volatility● More volatile the market, greater risk for mishedging

●Messaging/Quoting Limits


Background

●Patrick S Hemminger

●Head Equity Index / Commodity Trader at NetCap Advisors

●8 years Experience Managing Proprietary Portfolios

●Experience trading ● Equity Indexes● Commodities (Oil, Products, Grains, Meats)● Currencies (Spot, Futures)● Treasuries (Futures, Cash)


Alpha Generating Spread Strategies

● Eurex vs. Eurex and Non-Eurex vs. Eurex Spreads

● FESX vs. FDAX

● ES vs. FDAX

● ES vs. FESX

● Trade Factor Analysis

● Pre – Trade Analysis● Identifying Areas of Value

Name, place, date

Spread ExamplesFESX vs. FDAX

36

Name, place, date

ES vs. FDAX

37

Name, place, date

ES vs. FESX

38

Name, place, date

ES / FESX / DAX Fly

39

Name, place, date

Trade Factor Analysis

● Normalizing, why?

- Cohesion / relationship

- Replication

● Normalization Factors

- Instrument Tick Value

- Instrument Notional Value

- Instrument Base Currency

- Instrument Historical Volatility

- 60 Day

- 30 Day

40

Name, place, date

Trade Factor Analysis

● Benchmarking - ES

- Global Equity Index Benchmark, the Standard

- Provides focus

- Manage Expectations / Performance

- Most Liquid

- ES – 100MA = 2.5 MM per day

- FESX – 100MA = 1.5 MM per day

● Currency Component

- Instrument Base Currency

- Residual Balance Strategy – Intraday / End of Day

- Hedge w/ Future

- Exchange for Physical (EFP)

- Spot Transaction

41

Name, place, date

Pre-Trade Analysis - KISS

● Beta - Quick and Simple - Gauging Price Fluctuations- Where is the Risk / Volatility - Time- Benchmark- Relationship between Dependent &

Independent- Liquidity

42

Name, place, date

Pre-Trade Analysis

● Time of Day Analysis- Be Aware of Open and Close Times- Organize Day- Time Brackets

- 9 Separate Brackets- Time of Day for Opportunities- Probabilities

43

Name, place, date

Pre-Trade Analysis

● Long Term Standard Deviation Analysis- Bollinger Bands - +/-1 = Momentum- +/-2.5- Distance Between Bands- Slope of Bands- Historical Effectiveness- Coast - to - Coast

44

Name, place, date

Bollinger Band Example

45

Name, place, date

Market Profile

● Long Term Standard Deviation Analysis- Time Price Opportunities- Point of Control- Value Area High (VAH)- Value Area Low (VAL)

46

Name, place, date

Market Profile Example

47

Name, place, date

Technical's

● Trend lines● Double Tops / Bottoms● Fibonacci Retracements● Slow Stochastic● Complimentary Markets● Top Down Approach

48

Name, place, date

TechnicalsTrend lines / Double Tops / Double Bottoms

49

Name, place, date

Technical'sFibonacci Retracements

50

Name, place, date

Technical'sFibonacci Retracements

51

Name, place, date

Technical'sSlow Stochastic (SStoch)

52

Name, place, date

Technical'sComplimentary Markets

53

● Be Cognizant of Constituents● Identify Sectors Under / Out Performing● What markets are in the news● Currencies

- EURUSD- GBPUSD- EURJPY

● Be aware of Constituents in the Commodity Industry

- Oil- Gold

Name, place, date

Technical'sTop Down Approach

54

● Anchor Charts- Daily / 30 min / 5 min

● Trade on the side of the market● Contrarian positions

- Managing Risk

- Take a loser, Opportunity Cost

● Tape Read / Feel

Name, place, date

Contact Information

• John Netto

• [email protected]

• 212-315-0650

• www.osoktrading.com

• www.netblackcapital.com

• www.m3capital.com

• Capital allocations, consulting, boutique brokerage services, sell-side / buy-side conferences, trader education

Name, place, date

Contact Information

Patrick S Hemminger

[email protected]

630.723.4730


© Eurex 2009

Deutsche Börse AG (DBAG), Clearstream Banking AG (Clearstream), Eurex Frankfurt AG, Eurex Clearing AG (Eurex Clearing) as well as Eurex Bonds GmbH (Eurex Bonds) and Eurex Repo GmbH (Eurex Repo) are corporate entities and are registered under German law. Eurex Zürich AG is a corporate entity and is registered under Swiss law. Clearstream Banking S.A. is a corporate entity and is registered under Luxembourg law. U.S. Exchange Holdings, Inc. and International Securities Exchange Holdings, Inc. (ISE) are corporate entities and are registered under U.S. American law. Eurex Frankfurt AG (Eurex) is the administrating and operating institution of Eurex Deutschland. Eurex Deutschland and Eurex Zürich AG are in the following referred to as the “Eurex Exchanges”.

All intellectual property, proprietary and other rights and interests in this publication and the subject matter hereof (other than certain trademarks and service marks listed below) are owned by DBAG and its affiliates and subsidiaries including, without limitation, all patent, registered design, copyright, trademark and service mark rights. While reasonable care has been taken in the preparation of this publication to provide details that are accurate and not misleading at the time of publication DBAG, Clearstream, Eurex, Eurex Clearing, Eurex Bonds, Eurex Repo as well as the Eurex Exchanges and their respective servants and agents (a) do not make any representations or warranties regarding the information contained herein, whether express or implied, including without limitation any implied warranty of merchantability or fitness for a particular purpose or any warranty with respect to the accuracy, correctness, quality, completeness or timeliness of such information, and (b) shall not be responsible or liable for any third party’s use of any information contained herein under any circumstances, including, without limitation, in connection with actual trading or otherwise or for any errors or omissions contained in this publication.

This publication is published for information purposes only and shall not constitute investment advice respectively does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. This publication is not intended for solicitation purposes but only for use as general information. All descriptions, examples and calculations contained in this publication are for illustrative purposes only.

Eurex and Eurex Clearing offer services directly to members of the Eurex exchanges respectively to clearing members of Eurex Clearing. Those who desire to trade any products available on the Eurex market or who desire to offer and sell any such products to others or who desire to possess a clearing license of Eurex Clearing in order to participate in the clearing process provided by Eurex Clearing, should consider legal and regulatory requirements of those jurisdictions relevant to them, as well as the risks associated with such products, before doing so.

Eurex derivatives (other than Dow Jones EURO STOXX 50® Index Futures contracts, Dow Jones EURO STOXX® Select Dividend 30 Index Futures contracts, Dow Jones STOXX 50® Index Futures contracts, Dow Jones STOXX® 600 Index Futures contracts, Dow Jones STOXX® Large/Mid/Small 200 Index Futures contracts, Dow Jones EURO STOXX® Banks Futures contracts, Dow Jones STOXX® 600 Banks/Industrial Goods & Services/Insurance/Media/Personal & Household Goods/Travel & Leisure/Utilities Futures contracts, Dow Jones Global Titans 50 IndexSM Futures contracts, DAX® Futures contracts, MDAX® Futures contracts, TecDAX® Futures contracts, SMIM® Futures contracts, SLI Swiss Leader Index® Futures contracts, RDXxt® USD – RDX Extended Index Futures contracts, Eurex inflation derivatives, Eurex commodity derivatives, and Eurex interest rate derivatives) are currently not available for offer, sale or trading in the United States or by United States persons.

Trademarks and Service Marks

Buxl®, DAX®, DivDAX®, eb.rexx®, Eurex®, Eurex Bonds®, Eurex Repo®, Euro GC Pooling®, Eurex Strategy WizardSM, EXTF®, FDAX®, FWB®, MDAX®, ODAX®, TecDAX®, VDAX®, VDAX-NEW®, Xetra® and XTF Exchange Traded Funds® are registered trademarks of DBAG.

The service mark MSCI Russia is the exclusive property of Morgan Stanley Capital International, Inc.

RDXxt® is a registered trademark of Wiener Börse AG (Vienna Stock Exchange).

iTraxx® is a registered trademark of International Index Company Limited (IIC) and has been licensed for the use by Eurex. IIC does not approve, endorse or recommend Eurex or iTraxx® Europe 5-year Index Futures, iTraxx® Europe HiVol 5-year Index Futures and iTraxx® Europe Crossover 5-year Index Futures.

Eurex is solely responsible for the creation of the Eurex iTraxx® Credit Futures contracts, their trading and market surveillance. ISDA® neither sponsors nor endorses the product’s use. ISDA® is a registered trademark of the International Swaps and Derivatives Association, Inc.

IPD® UK Annual All Property Index is a registered trademark of Investment Property Databank Ltd. (IPD and has been licensed for the use by Eurex for derivatives.

SLI®, SMI®, SMIM®, and VSMI® are registered trademarks of SIX Swiss Exchange.

STOXX®, Dow Jones STOXX® 600 Index, Dow Jones STOXX® Large 200 Index, Dow Jones STOXX® Mid 200 Index, Dow Jones STOXX® Small 200 Index, Dow Jones STOXX® TMI Index, VSTOXX® Index, Dow Jones EURO STOXX 50® DVP, Dow Jones EURO STOXX® Select Dividend 30 Index, Dow Jones EURO STOXX®/STOXX® 600 Sector Indexes as well as the Dow Jones EURO STOXX 50® Index and Dow Jones STOXX 50® Index are service marks of STOXX Ltd. and/or Dow Jones & Company, Inc.

Dow Jones, Dow Jones Global Titans 50 IndexSM and Dow Jones Sector Titans IndexesSM are service marks of Dow Jones & Company, Inc. The derivatives based on these indexes are not sponsored, endorsed, sold or promoted by STOXX Ltd. or Dow Jones & Company, Inc., and neither party makes any representation regarding the advisability of trading or of investing in such products.

The names of other companies and third party products may be trademarks or service marks of their respective owners.

eurex spread trading equity index futures master

Documents

sdf gy equity

rwe gy equity rwe ag

man gy equity man ag

hen3 gy equity henkel

bei gy equity beiersdorf

bay gy equity bayer

meo gy equity metro

cbk gy equity commerzbank