Better book is an analysis of flashboys called
Flash boys: Not so fast by kovac
Market makers vs. Market takers
- Thread starter Jzwu2017
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Flash boys: Not so fast by kovac
I obsessed over this, since the guys on ET all seemed to have the inside baseball on it, and because I'm just an obsessive compulsive autodidact (math and finance in particular). I refer to this as 'industry knowledge'.
IMO, the most important market-making to understand are the basis spreads, both the index and bond basis trades. Then the yield curve (AKA rate spreads) market and the CME inter-commodity spread (ICS) market. The size traded here absolutely dwarfs stuff I used to think was most important.
Vol basis is something I haven't really figured out, but modeling volatility is good enough.
I really like that documentary with the Nanex guy and the fuckin' quant super geek... lol
IMO, the most important market-making to understand are the basis spreads, both the index and bond basis trades. Then the yield curve (AKA rate spreads) market and the CME inter-commodity spread (ICS) market. The size traded here absolutely dwarfs stuff I used to think was most important.
Vol basis is something I haven't really figured out, but modeling volatility is good enough.
I really like that documentary with the Nanex guy and the fuckin' quant super geek... lol
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Bookmarked for later, looks intriguing.
DOT as in NYSE’s Designated Order Turnaround system?
Other than basics from google, what’s a top shelf reference to learn more about Basis Spreads?
It's actually part of the CFA curriculum (Level III, I believe).
You can listen to this guy talk about running the index arb business for UBS for eight years and then as an independent running his own execution desk. His clients include locals from the S&P options pit and other institutional folks.
It's informative to know how the futures are priced, but you can just research the spreads using the premiums data. Index basis/index arb/cash&carry is the same idea as any other futures pricing. The carrying costs and financing rates are built into the price just like in the hydrocarbons/softs/metals futures markets (eg. "convenience yield"). Liquidity is provided in both directions and you have the major players hedging inventory, carrying/delivery obligations, as well as facilitating execution/market making, etc.
You have to know that one side of the trade is local to the NY/NJ data center, and the other is in Aurora, IL. Unreal amounts of money are involved in it at all times and inside every millisecond of RTH.
This is a pricing model (lifted from quantstackexchange.com by yours truly.)
You don't have to know what this means, but you should understand how important the actual basis spreads are. You can price the spreads with your regular ticker data available from any good broker
ES - SPX
NQ - NDX
YM - 100*DJX
RTY - RUT
but knowing how they can be useful to inform trades takes a lot of work. You can also look at the cash side of the trade using market internals like TIKI.
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It's actually part of the CFA curriculum (Level III, I believe).
You can listen to this guy talk about running the index arb business for UBS for eight years and then as an independent running his own execution desk. His clients include locals from the S&P options pit and other institutional folks.
It's informative to know how the futures are priced, but you can just research the spreads using the premiums data. Index basis/index arb/cash&carry is the same idea as any other futures pricing. The carrying costs and financing rates are built into the price just like in the hydrocarbons/softs/metals futures markets (eg. "convenience yield"). Liquidity is provided in both directions and you have the major players hedging inventory, carrying/delivery obligations, as well as facilitating execution/market making, etc.
You have to know that one side of the trade is local to the NY/NJ data center, and the other is in Aurora, IL. Unreal amounts of money are involved in it at all times and inside every millisecond of RTH.
This is a pricing model (lifted from quantstackexchange.com by yours truly.)
You don't have to know what this means, but you should understand how important the actual basis spreads are. You can price the spreads with your regular ticker data available from any good broker
ES - SPX
NQ - NDX
YM - 100*DJX
RTY - RUT
but knowing how they can be useful to inform trades takes a lot of work. You can also look at the cash side of the trade using market internals like TIKI.
Thank you for an informative post. Looking forward to a time slot to watch the linked vid.
What is "e" defined as in the first equation?
I'm familiar with TICK but not TIKI as a market internal to monitor.
Is the above quantstackexchange equation what is used to determine these values at https://www.indexarb.com/ ? Their description is not as detailed.
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e is the constant e (2.7xxxxx)
It is the limit of continously compounded returns which reasonably approximates index dividends as there is some constituent paying out every day.
No worries. It's derivatives 101 stuff, but it's just a formula based on some ease of use assumptions.
Real firms use an actual dividend forecast built bottom's up from the constituents.