Why Do Pairs go wrong?

I've had several former ace Bright Trading Traders and a former Morgan Stanley Pairs Trader as clients who wanted to move over to the futures space - in their opinions the equity pairs were too saturated with bots and automation.

The futures typically don't have the cointegration issues that equity pairs have. Just my thoughts, YMMV.
 
bone said:
I've had several former ace Bright Trading Traders and a former Morgan Stanley Pairs Trader as clients who wanted to move over to the futures space - in their opinions the equity pairs were too saturated with bots and automation.

The futures typically don't have the cointegration issues that equity pairs have. Just my thoughts, YMMV.
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The problem is that cointegration is itself intrinsically unreliable. That was the whole point of me starting this thread.

  • I am not certain re:stocks, but I suspect that most of the players are not trading them is not because equity pairs are saturated, but because the [simple] quantitative tools are inadequate there.
  • Things like Gold Futures vs Silver Futures might work more reliably, but that thing is saturated with bots to the gills.
  • I think the stuff that people feel comfortable with are the IR spreads. One day [probably soon], that is going to blow out lots of people though, imo.
  • Forex spreads are also an idea, since they are intrinsically pair trades to begin with.

My guess is that the very well founded and genuinely alpha generating firms like RenTech are probably trading many of these asset classes in a pair style.
 
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I built nice software that allows me to:

  • Do the research without using R. It is way easier to use. Just mouse clicks.
  • Once I have the pairs and the risk parameters, I have software that allows me to trade any pair with any number of legs on any broker on different or the same asset classes.
The problem isn't the software, it is the skill to find the right methodology.
 
I'm hard pressed to think of a worse behaving ill-tempered futures spread than Gold vs. Silver. There are literally thousands of better futures combinations in terms of modeling reliability and trading success.
 
bone said:
I'm hard pressed to think of a worse behaving ill-tempered futures spread than Gold vs. Silver. There are literally thousands of better futures combinations in terms of modeling reliability and trading success.
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What software do you use to come up with your relations and fractions?
 
JAWS said:
What software do you use to come up with your relations and fractions?
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Software is only good for initial screening in terms of choosing inter market spread candidates - the Bloomberg terminal Beta plot is one example of a software tool. It takes experience and proper spread trading technical methodology to select the best candidates to model and possibly trade.

You have not mentioned intra market futures spreads - which are the real money makers in terms of consistency and liquidity.

I teach my clients extensively on creating and trading inter market spreads like, as you mentioned, Gold vs Silver... But in the end they all gravitate to the intra market futures spreads. They are consistent, insanely cheap to margin and you can do stupid size. We are fond of butterflies and condors in particular ...
 
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