Single stock inverse ETF
- Thread starter Cuddles
- Start date
Zero gap between bid and ask or 1 or 2tick at max.
first 10 places of of bid and ask position should bid at least 30 to 50 Contracts at average at all times
Wow, so many things I don't get about this post.
"Liquidity is in the eye of the beholder" - why would you make this bizarre and aloof sounding statement. I don't think it's controversial to say that SSFs are extremely illiquid, and that this is the only reason that no one trades them given all the other advantages they have.
"completed via spreads" - what is a spread in this context?
"put up barriers to discourage day trading" - why? you don't want to make money?
"most trades occur outide of the central limit order book" - how do you do a trade without going through the book? is this something available to me as a retail customer of IBKR ?
"difficulties in getting market-makers to make meaningful markets when our pricing is currently constrained to two decimal places" - I must be missing something here. Doesn't the bid/ask spread have to be under 1-2 cent for this to even be relevant? most SSFs quotes have massive spreads, how will more decimal places help at all?
I am sorry for the confusion. I have re-read my post and concluded that if I were to write it again it would be the same language. Let me address you points.
1.I maintain that liquidity is in the eye of the beholder even though it may sound 'bizarre and aloof' (thank you that. It made me laugh out loud) because I have engaged in this debate for 3 decades across many of the execution arenas around the world in stocks, bonds, commodities and their respective derivatives. In the case of OneChicago's products - Security Futures or Single Stock Futures SSF- we have a unique characteristic. Very low transaction rates with very high notional value per transaction. The average transaction at our exchange is just above $2million in NV. There are small trades with low notional but their are very large $75 - $100 million that go up. 1 trade. 1 price. That is liquidity. The beauty is that traders of any size can participate. I often see individual traders interact with some of the largest trading desks in the world. Where else can you do that?
2. Spreads is the main transaction at OneChicago and it is by design. Let me back up a step. Investors - note I did not say traders - can take a position via the SSF instead of buying on margin, either Reg T or in PM. In all cases the most significant component is the interest rate you will be paying to carry the position. If you are going to take a stake for a term you should look for the best vehicle that carries the lowest interest charge. Often, but not always, you will find SSF to be a lower cost position after the interest charges. To be very clear this is why brokers do not provide access to the product. They make a great deal of money from lending to you on margin.
The second way to use the product is by deploying your idle cash in near risk less transactions. These are called time spreads. Buy the near term and sell the longer dated in an integrated transaction. This position has zero exposure to the underlying movements as you are both long and short. The only difference between the two legs is Time and the only pricing difference in Interest. As the short dated contract goes through expiry you will be required to take delivery of the underlying by deploying your idle cash to purchase. The delivery process simply converts one Delta 1 instrument into another Delta 1 instrument leaving you Long Stock/Short SSF. A perfectly hedged position and all you do is wait for the time to drip away and when the long dated contract expires and goes through delivery you are obligated to deliver the stock in the account and you get the cash back with the interest component as yield. This is a very popular transaction and it replicates what happens on a Delta 1 trade desk at the Prime Brokers. Hedge fund calls the Delta desk and wants to get long $50MM of ABC synthetically via swap or SSF. Delta desk pre-hedges buy actually buying the ABC stock and then appends an interest component to the VWAP price and that becomes the swap price. Desk is always hedged hence the name DELTA 1. Customer is in a risk position and the only negotiation was? Interest rates.
You can do this to. This is Equity Repo. Selling spreads is acting like the Delta desk. Securely lending cash for term under the protection of the AA+ Options Clearing Corp. Quick note on this: Selling the spread means you are 'selling' the term so you would BUY the short dated contract and Sell the long dated contract.
Our last type of transaction is a very special type of spread. We call them STARS. Security Transfer and Return Spreads. They are used by both the REPO desks as well as the Security Lending participants. The only difference is that the front leg of these spreads use our T+1 settled weekly future (We list and expire these contracts every day). They want the T+1 feature so that the brokers don't have use of the cash and securities for any longer than needed. This is the most exciting product I have been involved with and you will be hearing much more in the future. It all depends on Tax Reform but if financial products is included we will have some very good news for you and finally you will be able to lend your securities to each other instead of relying on the brokers. Please pay attention to this. This has the potential to fundamentally change the way the US capital markets operate.
I have to run. I will finish my response later.
1.I maintain that liquidity is in the eye of the beholder even though it may sound 'bizarre and aloof' (thank you that. It made me laugh out loud) because I have engaged in this debate for 3 decades across many of the execution arenas around the world in stocks, bonds, commodities and their respective derivatives. In the case of OneChicago's products - Security Futures or Single Stock Futures SSF- we have a unique characteristic. Very low transaction rates with very high notional value per transaction. The average transaction at our exchange is just above $2million in NV. There are small trades with low notional but their are very large $75 - $100 million that go up. 1 trade. 1 price. That is liquidity. The beauty is that traders of any size can participate. I often see individual traders interact with some of the largest trading desks in the world. Where else can you do that?
2. Spreads is the main transaction at OneChicago and it is by design. Let me back up a step. Investors - note I did not say traders - can take a position via the SSF instead of buying on margin, either Reg T or in PM. In all cases the most significant component is the interest rate you will be paying to carry the position. If you are going to take a stake for a term you should look for the best vehicle that carries the lowest interest charge. Often, but not always, you will find SSF to be a lower cost position after the interest charges. To be very clear this is why brokers do not provide access to the product. They make a great deal of money from lending to you on margin.
The second way to use the product is by deploying your idle cash in near risk less transactions. These are called time spreads. Buy the near term and sell the longer dated in an integrated transaction. This position has zero exposure to the underlying movements as you are both long and short. The only difference between the two legs is Time and the only pricing difference in Interest. As the short dated contract goes through expiry you will be required to take delivery of the underlying by deploying your idle cash to purchase. The delivery process simply converts one Delta 1 instrument into another Delta 1 instrument leaving you Long Stock/Short SSF. A perfectly hedged position and all you do is wait for the time to drip away and when the long dated contract expires and goes through delivery you are obligated to deliver the stock in the account and you get the cash back with the interest component as yield. This is a very popular transaction and it replicates what happens on a Delta 1 trade desk at the Prime Brokers. Hedge fund calls the Delta desk and wants to get long $50MM of ABC synthetically via swap or SSF. Delta desk pre-hedges buy actually buying the ABC stock and then appends an interest component to the VWAP price and that becomes the swap price. Desk is always hedged hence the name DELTA 1. Customer is in a risk position and the only negotiation was? Interest rates.
You can do this to. This is Equity Repo. Selling spreads is acting like the Delta desk. Securely lending cash for term under the protection of the AA+ Options Clearing Corp. Quick note on this: Selling the spread means you are 'selling' the term so you would BUY the short dated contract and Sell the long dated contract.
Our last type of transaction is a very special type of spread. We call them STARS. Security Transfer and Return Spreads. They are used by both the REPO desks as well as the Security Lending participants. The only difference is that the front leg of these spreads use our T+1 settled weekly future (We list and expire these contracts every day). They want the T+1 feature so that the brokers don't have use of the cash and securities for any longer than needed. This is the most exciting product I have been involved with and you will be hearing much more in the future. It all depends on Tax Reform but if financial products is included we will have some very good news for you and finally you will be able to lend your securities to each other instead of relying on the brokers. Please pay attention to this. This has the potential to fundamentally change the way the US capital markets operate.
I have to run. I will finish my response later.
Sorry for the delay.
"put up barriers to discourage day trading" - why? you don't want to make money?
I think there are plenty of execution arenas that already support day trading and I have nothing new to add. As I mentioned in my prior post users of our products are investors first. They hold their positions for a term and they want to minimize the amount of interest on that carry.
"most trades occur outide of the central limit order book" - how do you do a trade without going through the book? is this something available to me as a retail customer of IBKR ?
IB EFP is an example of an off-exchange forum which produces transactions that are reported to the exchange and passed through clearing. In the prior post I explained how Hedge Funds interact with the Delta 1 desks. IBKR does not provide that type of service but there are FCMs and IDBs who do provide intermediation but they may have their own restrictions.
"difficulties in getting market-makers to make meaningful markets when our pricing is currently constrained to two decimal places" - I must be missing something here. Doesn't the bid/ask spread have to be under 1-2 cent for this to even be relevant? most SSFs quotes have massive spreads, how will more decimal places help at all?[/QUOTE]
This is about basis points. The 4 decimal resolution is required to obtain the correct interest rate.
"put up barriers to discourage day trading" - why? you don't want to make money?
I think there are plenty of execution arenas that already support day trading and I have nothing new to add. As I mentioned in my prior post users of our products are investors first. They hold their positions for a term and they want to minimize the amount of interest on that carry.
"most trades occur outide of the central limit order book" - how do you do a trade without going through the book? is this something available to me as a retail customer of IBKR ?
IB EFP is an example of an off-exchange forum which produces transactions that are reported to the exchange and passed through clearing. In the prior post I explained how Hedge Funds interact with the Delta 1 desks. IBKR does not provide that type of service but there are FCMs and IDBs who do provide intermediation but they may have their own restrictions.
"difficulties in getting market-makers to make meaningful markets when our pricing is currently constrained to two decimal places" - I must be missing something here. Doesn't the bid/ask spread have to be under 1-2 cent for this to even be relevant? most SSFs quotes have massive spreads, how will more decimal places help at all?[/QUOTE]
This is about basis points. The 4 decimal resolution is required to obtain the correct interest rate.
Why should I care if hedge funds are able to use the exchange to report/clear their gigantic trades that they somehow managed to agree on through some esoteric mechanism. To call this "liquidity" .. well I just don't get it, sorry.
For SSFs to be attractive to me as a retail investor, I need to be able to get filled quickly and at a reasonable price. I'm not going to cross a 10 cent spread on a stock I'm holding for a month, because it won't actually save me any money compared to just paying the broker margin interest... it defeats the whole point
I also still don't get how more decimal places will help attract market markers. If the bid/ask spread is 10 cents, who cares about the fractional cents?
For SSFs to be attractive to me as a retail investor, I need to be able to get filled quickly and at a reasonable price. I'm not going to cross a 10 cent spread on a stock I'm holding for a month, because it won't actually save me any money compared to just paying the broker margin interest... it defeats the whole point
I also still don't get how more decimal places will help attract market markers. If the bid/ask spread is 10 cents, who cares about the fractional cents?