Trading Risk on / Risk off

Real Money

Real Money

I have analyzed the CME, CBOE, ECBOT, NASDAQ, NYSE data.

The bond market is driving the price action in the indexes.
HFT is being used to provide liquidity for this trade.

This means that if you are trading ES then you are essentially just trading the front leg of a ES/ZB, or ES/UB spread.

This is pretty awesome because if you have the quant skills it's as simple as tracking HFT activity. Nearly all of their activity is market neutral. HFT captures arbitrage that can produce profit above the financing rate of their firm.

Any of you elite traders spreading rate futures against indexes? Examples would be

Trade ES against ZB

Buy NQ and short Ultra Bonds

Essentially, spreading baskets of index futures against baskets of rate futures is looking like the elite trade.

Any of you ELITE TRADERS care to comment?
 
Real Money said:
I have analyzed the CME, CBOE, ECBOT, NASDAQ, NYSE data.

The bond market is driving the price action in the indexes.
HFT is being used to provide liquidity for this trade.

This means that if you are trading ES then you are essentially just trading the front leg of a ES/ZB, or ES/UB spread.

This is pretty awesome because if you have the quant skills it's as simple as tracking HFT activity. Nearly all of their activity is market neutral. HFT captures arbitrage that can produce profit above the financing rate of their firm.

Any of you elite traders spreading rate futures against indexes? Examples would be

Trade ES against ZB

Buy NQ and short Ultra Bonds

Essentially, spreading baskets of index futures against baskets of rate futures is looking like the elite trade.

Any of you ELITE TRADERS care to comment?
More...

Where's the edge?

Money moves from stocks to bonds & the reverse but if you can't see one market leading the other on a chart to give a "heads-up" for the lagging market, does it do you any good?

If you trade highly correlated baskets against one another, that alone isn't an edge either. If I were going to trade a highly correlated pairs strategy, I'd prefer ES vs. NQ rather than using bonds. Simpler & higher correlation but still need a strategy with an edge.

Sorry, just need more detail on how you'd trade your information.
 
An edge is a separate thing. I use technology to track HFT activity in real-time. That's my edge. In developing this technology I was 'hunting the whale' so to speak and it lead me directly to the bond market. To the point where I can reverse the aim of the thing and trade bonds with it instead.

I was using HFT arb activity in index futures to get an edge on those, but it turns out that the rate futures are driving the index HFT arb.

I'm not saying that the price action is gonna lead either instrument. In fact I'm saying the opposite is true. HFT liquidity is being used to increase the efficiency of this trade (i.e. reduce the lag).

Just saying that you could

long index against bonds
long index and bonds
long bonds and short index

lots of options here....

Bum said:
how you'd trade your information
More...

You would chart/analyze the cash value of the spread instruments (and weight them in a smart way). This way you would see detail in the relationship that the outright charts would hide.
 
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Real Money said:
I have analyzed the CME, CBOE, ECBOT, NASDAQ, NYSE data.

The bond market is driving the price action in the indexes.
HFT is being used to provide liquidity for this trade.

This means that if you are trading ES then you are essentially just trading the front leg of a ES/ZB, or ES/UB spread.

This is pretty awesome because if you have the quant skills it's as simple as tracking HFT activity. Nearly all of their activity is market neutral. HFT captures arbitrage that can produce profit above the financing rate of their firm.

Any of you elite traders spreading rate futures against indexes? Examples would be

Trade ES against ZB

Buy NQ and short Ultra Bonds

Essentially, spreading baskets of index futures against baskets of rate futures is looking like the elite trade.

Any of you ELITE TRADERS care to comment?
More...

are you analyzing L2 orderbook data? What software is used to collect and research?
 
HFT arb is cash and carry and reverse cash and carry. To track this you have to spread the front month CME/ECBOT quotes and NYSE ETF share prices against their CBOE cash index tickers. I use IB EXCEL API to do the analysis.

ES PREM.png
 
This is simple to backtest, you can try to backtest this to validate your hypothesis. My guess is you need more factors for your model.
 
traider said:
This is simple to backtest, you can try to backtest this to validate your hypothesis.
More...

There is nothing to backtest here. There is no hypothesis.

My HFT arb quant stuff is a structural edge (I know it works).

My point is for all of the guys trying to trade indexes. You need to start watching the bond market because they are the ones that are doing the buying and selling.

Basically, it's like this. The bond market doesn't know for sure whether equities are going to outperform bonds or not (could start eating into returns of a typical 401(k)). So they position themselves aggressively in anticipation of the next move in equities.

It's not as simple as "negatively correlated" here.

An equity basket (index futures) traded against a long dated bond (via rate futures) using relative value will put you exactly where you need to be to trade risk on / risk off.

Maybe @bone can comment on this stuff. I can't believe that traders don't even understand the basics. This stuff should be pretty simple.
 
If there's such strong exploitable edge, one of the below should happen:
A) The edge gets arb'd away until it's so small that see B)
B) To monitize the edge, special infrastructure and/or personal connections are required that prevents most from exploiting it.

The rest is a judgement call, no?
 
Edge on what. Arb what. You have to be specific or it's just talk that means nothing.

Funds allocate capital. They allocate between fixed income and equities to reduce portfolio volatility.

They rotate between conservative allocation (risk off), and aggressive allocation (risk on).

Trading risk on / risk off is therefore an index / rate future spread. I'm also saying that they base this decision off of the performance of a portfolio of mixed exposures.
 
Real Money said:
My HFT arb quant stuff is a structural edge (I know it works).
More...

qlai said:
If there's such strong exploitable edge, one of the below should happen:
A) The edge gets arb'd away until it's so small that see B)
B) To monitize the edge, special infrastructure and/or personal connections are required that prevents most from exploiting it.
More...
 
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