In US Government bond trading are the futures traded off the cash market or does the cash market drive the futures market? When my order sent through IB to the CBOT is the best bid and I get a fill does that mean someone from Goldman Sachs got a fill in the interbank cash market and is able to punch in the futures market to lock in a profit? Is that what the market makers do, continually arb between the futures and cash market or is it a mutual in tandem price discovery process. Does the cash market have the same tick size?
Who arbs who
- Thread starter zf trader
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futures are way more liquid than cash. cash is very dispersed.
The volume of Treasuries represented by the average daily volume of futures contracts is LARGER than the average daily volume in the Treasury market itself.
From an article by Elizabeth Roy, Senior Writer at TheStreet.Com
11/11/98:
"According to GovPX, the association of 32 primary dealers of U.S. government securities and four interdealer brokers, an average of $75 billion to $80 billion of Treasury securities changes hands each day. The 30-year bond accounts for less than 10% of that volume.
The above figures capture only interdealer trades; they don't include trades between the dealers and their clients, such as mutual funds and insurance companies. The New York Fed does a more complete tally on a weekly basis. Still, according to its numbers, only about $225 billion of Treasuries change hands each day, and securities that mature in five years or less account for more than half.
The Treasury market has $5.5 trillion of bonds and notes outstanding. Only about $2.9 trillion of those are marketable -- not held by the Social Security trust fund or the Federal Reserve banks or in escrow to pay off refinanced municipal bonds, and not savings bonds.
So few of the marketable Treasuries change hands each day because, in contrast to the futures market, the Treasury market itself is heavily patronized by individual investors who buy securities at auction and then hold them until they mature, never once trading them. The futures market, by contrast, is all traders. Players almost never take delivery of the underlying bonds at expiration; they simply "roll" into the next contract. (Contracts expire on the last business day of each quarter, and stop trading on the seventh business day preceding that day.)"
http://www.thestreet.com/pf/markets/keynumbers/627710.html
From an article by Elizabeth Roy, Senior Writer at TheStreet.Com
11/11/98:
"According to GovPX, the association of 32 primary dealers of U.S. government securities and four interdealer brokers, an average of $75 billion to $80 billion of Treasury securities changes hands each day. The 30-year bond accounts for less than 10% of that volume.
The above figures capture only interdealer trades; they don't include trades between the dealers and their clients, such as mutual funds and insurance companies. The New York Fed does a more complete tally on a weekly basis. Still, according to its numbers, only about $225 billion of Treasuries change hands each day, and securities that mature in five years or less account for more than half.
The Treasury market has $5.5 trillion of bonds and notes outstanding. Only about $2.9 trillion of those are marketable -- not held by the Social Security trust fund or the Federal Reserve banks or in escrow to pay off refinanced municipal bonds, and not savings bonds.
So few of the marketable Treasuries change hands each day because, in contrast to the futures market, the Treasury market itself is heavily patronized by individual investors who buy securities at auction and then hold them until they mature, never once trading them. The futures market, by contrast, is all traders. Players almost never take delivery of the underlying bonds at expiration; they simply "roll" into the next contract. (Contracts expire on the last business day of each quarter, and stop trading on the seventh business day preceding that day.)"
http://www.thestreet.com/pf/markets/keynumbers/627710.html
Comparing relative notional/dollar volume between futures and cash depends on what sector of the curve we're talking about. Yes MUCH more futures volume is traded in 10/30yr than cash. However in two's and five's the cash market SMOKES the futures contracts.
Also keep in mind that much of the volume in tens and bonds is not just arb between cash Treasuries and futures but also traders hedging MBS's and corporate's against the contract.
Also keep in mind that much of the volume in tens and bonds is not just arb between cash Treasuries and futures but also traders hedging MBS's and corporate's against the contract.