Pair trading brokers

C

calhawk01

Hi

Anyone know a pair trading broker? I want to trade the spread between highly correlated (correlation > .98) instruments. My issue is that I cannot meet the overnight margin requirements. The current overnight margin requirements on, for example, NQ and Emini combined are over 10k. However, the underlying risk on this strategy is very much limited. The exchanges even have low margin requirements for pair trading strategies. Any broker out there that does the same??

Thanks
 
calhawk01 said:
http://www.cmegroup.com/clearing/margins/spread-calc.html

I emailed CME and will provide the reply. I cannot find the link on CME's website that showed the discounted margins for index futures.
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http://www.cmegroup.com/trading/equity-index/files/SP500_DJIA_Spreads_Final.pdf

Trading the Spread as a Ratio
Additionally, traders must also decide on the “quantity ratio” when actually trading the spread. How many
contracts of the respective index futures do you buy and sell? For traders who prefer to trade the
smallest quantities, trading the spread on a 1:1 basis is the obvious choice. However, for traders who are
trading larger quantities, and for those who are “position traders” (holding spreads for at least one day or
potentially much longer), trading a ratio of quantities is the preferred method. CME Clearing offers
reduced margins via Spread Credits for traders who use a ratio of 5:6 (five contracts of E-mini S&P 500
futures vs. six contracts of E-mini Dow futures).
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A couple things don't sound right. Where did you get the overnight margin of 10K for that spread? It should be considerably lower. Who is your current futures broker that is requiring this margin?

Referring to your first post, keep in mind that NQ is essentially a proxy for the tech sector (Nasdaq 100) and ES represents the broad market (S&P 500). These two can diverge considerably (in magnitude of price movement) even though they are highly correlated (move in same direction). So this "pair" has more risk than you suggest.
 
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Trader13 said:
A couple things don't sound right. Where did you get the overnight margin of 10K for that spread? It should be considerably lower. Who is your current futures broker that is requiring this margin?

Referring to your first post, keep in mind that NQ is essentially a proxy for the tech sector (Nasdaq 100) and ES represents the broad market (S&P 500). These two can diverge considerably (in magnitude of price movement) even though they are highly correlated (move in same direction). So this "pair" has more risk than you suggest.
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Correct, they can diverge significantly, and keep diverging. I have many variable at play that try to quantify the divergence.

10k = overnight margin of ES (5k) and overnight margin of NQ (4k). This margin is at Amp trading. They don't offer "special" spread margins for pair trading it seems. Even though the margins are set by the exchange rather than the broker! So either the people at AMP are not knowledgeable at the subject or they chooce to not offer spread margins. This is why I created this post to find brokers that do.
 
rmorse said:
I just found this: http://www.cmegroup.com/trading/equity-index/us-index/e-mini-nasdaq-100_performance_bonds.html?marginsTab=INTER&view=disablemobile#sector=EQUITY INDEX&exchange=CME

It looks like the CME offer a 65% reduction in margin from ND vs SP at a ratio of 2 to 1. It should be the same for NQ vs ES. I'm going to try and confirm this tomorrow.

Asset Class Spread Product Code Type Side Ratio Credit
EQUITY INDEX ND,SP NDSP Delta AB 2:1 65%
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I got the email reply from Clearing Risk Management @ CME.

"Hello,

Assuming that you are referring to the March 2015 Future contracts for both products (ES and NQ). initial combined margin would be 4543.00

Best,

Clearing Risk Management"
 
Have you contacted Amp to ask them about the spread margin? They might have some particular requirement, like a certain ratio, or that you have to enter the order as a spread and not leg it.
 
Trader13 said:
Have you contacted Amp to ask them about the spread margin? They might have some particular requirement, like a certain ratio, or that you have to enter the order as a spread and not leg it.
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I did, over four times. Chat and via email. On email they said no, and i told them about CME rule, and they stopped replying to my email. And chat said, they dont offer spread margins.
 
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