Forum posts

A forum has operated since 2006 but closed in 2014. Below are copies (complete with typos as posted) of the most relevant posts in a Q&A and chronological (newest first) format. Some of the older posts might have limited relevance in today’s markets


Opportunities in Eurodollar markets

Q: I traded Euribor and Euroswiss spreads from 2004 (rebate traded the middle/back of the curve) for 4 years straight out of uni in London. I have a mathematics background and since then moved to the states where I traded options with a small prop firm for a few years. I would like to get back into spread trading independently as a compliment to what I’m doing now but have no idea where to start. I am reading your book now but would like to know whether with interest rates where they are, if there is currently movement/opportunity in Eurodollar spread markets? And how to go about entering the market as a local (trading remotely)?

Thanks for any help/feedback you can provide.

A: If you have already traded Euribor spreads, then trading ED spreads shouldn’t be that much different except they are more liquid and more volatile. Generally, STIR trading has been depressed in recent years due to ZIRP (zero interest rate policy) but the consensus is that rates will start to rise in the US around summer of 2015. The anticipation of this will create more volatility and trading volumes have already picked up.

One thing you might not be aware of is the amount of HFT (high frequency trading) in ED. They largely use algorithms to provide liquidity to qualify for rebates but in doing so create a lot of noise.

Trading size vs. account size

Q: Great website and forum. I was referred to you by a well-regarded STIR trader on another forum.

I had a more general question around trading size.

Let’s say you had a $1 million account and trade Eurodollar spreads (calendars/flys) and hold from 2 weeks to 2 months. Obviously SPAN keeps margin requirements low, but you want to keep a safety buffer. How many lots would you generally put on for any one trade?

Just general numbers. I realize that every trade is different. Just trying to understand better.

A: Good question!

As you point out, SPAN can make ED spread trading very capital effective. Initial margins for 3M white  calendar spread are about $160 meaning at first measure , you could put on over 6000 spreads (1M/160). However, this takes no account of variation margin changes and each tick change on each spread will make or lose you $25. On 6000 spreads, that’s $150,000 per tick or 15% of your capital.

One approach is to quantity the riskiness of the spread using a VaR (value at risk) based approach. For example, the U4Z4 ED spread had a standard deviation of around 1 tick, worth $25 using a 3 month data sample from mid June to mid Sept. Focusing on risk and potential losses, this means that on any given trading day I might expect to lose between 0 and 1 tick on a spread with a 68% confidence, and a 32% confidence that I might lose more. If I wanted to increase my confidence to 99% and 1%, I could multiply the standard deviation of 1 tick by 2.33, making 2.33 ticks. This means that on any given trading day I might expect to lose between 0 and 2.33 ticks on a spread with a 99% probability of my possible losses being contained within this boundary, and a 1% probability that I might lose more.

I might then want to make a decision on how much capital I might want to risk losing on one trade. For a 2 week to 1 month horizon I might be willing to risk 5% of my capital ($50,000), meaning that I would trade around 850 spreads (50,000/(2.33 x 25). I would err on the lower side of capital at risk since most spread traders will have several similar spreads on at once which can be highly correlated meaning they have actually got more capital at risk on what is effectively the same trade.

Don’t use the numbers quoted above for any kind of real life risk management. In reality I would want to run VaR analysis over several time periods (1M, 3M 6M) and eyeball the results. Also, in this case, the front month spread movements can be unreliable as the front month locks into cash and the second month moves around it  I might also want to try to quantify my tail risk losses if they were to exceed that 99% confidence. I would also want to take liquidity into account. A 3M white or red spread would be very liquid but a 9M green/gold spread less so. Of course, all of this this is in context of VaR methodologies being based upon statistical assumptions which might be untenable in certain market conditions.

Liffe Swapnotes

Q: I have a question on Swapnotes. From the section in “STIR Futures” on  Liffe Euro Swapnotes:  “Swapnote is not a future on a swap but rather a bond future priced from the swap curve.” So if I’m understanding correctly and there is no sovereign fixed rate exposure, then the highest correlated swapnote spread would only include a Euribor bundle (with matching DV01’s) and no Shatz or Bobl futures involved. Would that be accurate? (If so, it seems strange that they call it a swap)

A: You are correct that the reference to swapnote being like a bond future priced from the swaps curve does not mean that there is any sovereign credit exposure.

€ Swapnote is priced from the EUR swaps curve/Euribor forward curve and therefore the closest proxy would be Euribor bundles. There is essentially no credit spread but the spread between the two would be driven by convexity and incidence of cashflows.

Q: Thanks for your helpful reply. If I could ask another question: I’m currently trading Swapnote against a Euribor stack well correlated to the 5yr bundle; however, I’m having difficulty assessing event risk on this spread due to a lack of accurate historical continuation data. Assuming the lead instrument of the spread is the Swapnote, in your estimation/experience, how would this spread behave in the event of a 2008 or 2011 financial crisis (i.e., would the spread widen or narrow)? 

A: Interesting question! You should be able to find continuation history for both contracts – they’ve been around for a while.

Attached is a graph showing 10 years continuation history of € 2 yr Swapnote (FBS) versus the front red Euribor (FEI)on continuation (this is trickier than it sounds due to serial month interference and so I cannot be entirely confident of the data without further investigation but it should be a good proxy)

There is an element of event risk in 2008 and 2011 and the stack seems to outperform swapnote – this could due to several factors such as liquidity, data issues or the charting methodology (simplistic overlay)
Euribor TED

Q: I have been trading US treasuries against Eurodollar strips intraday and wondering if there is the same trade overseas. I heard or spreading Schatz vs Euribor but was looking for the trade against the bobl. Does this exist?

A: The Euribor 2Y bundle against the Schatz is a popular trade but there is limited liquidity in 5Y bundles to trade against the bobl. The euribor future has less liquidity along the curve than ED. You could trade mid curve stacks against bobls as a proxy with acceptance of curve risk.

Curve software

Q: Do you know any good program to chart the stirs and eurodollar curves, and also to compare them in time I saw in an message, this imagine i attached. Can sb please tell me which soft is it ???Also please take in consideration that i am an retail trader, and do not have the possibility to pay for bloonberg or similar things 2000k a month…

A: The software from the photo you uploaded is Reuters (eother 3000 xtra or Eikon). The chart is of implied forawrd rates from STIR’s.You could try Metastock (with Equis as a datafeed) as a charting package. I’ve used it before and think it’s good for end of day studies. 

TED/credit spread ratios

Q: I am seeking some advice on trading a TED like credit spread between Euribor and Schatz.I understand that you cannot give implicit advice that might be interpreted as trade recommendations etc, but I would greatly appreciate some guidance on getting the correct ratios.I understand I need to take into account the pvbp/DV01 for the CTD bond?  How do I then related this to the Euribor?I have seen some suggest trading the 4th or 5th Euribor contract against the Schatz, but elsewhere been told to look at the last red or first green? In your book you talk of trading a pack or bundle to correctly balance the spread, although one could fudge it with a couple of different Euribor contracts against the 2 year note.  I’m a local though so this seems a little excessive.I’m also a little unsure how I should reconcile the different tick values to obtain a suitable ratio.  I’m currently wondering if 25:18 is around the right Schatz:Bor ratio?Any advice would be greatly appreciated.

A: TED’s are covered comprehensively in the book (page 158 onwards,second edition and also in the older first edition). Are you asking something further or something not fully understood?

Chart ratios are on p.169. CGQ has a different and simpler methodology for displaying charts and I think there is a thread on it in this forum somewhere.

Gauging market direction. Intraday

Q: I have recently taken up stir trading but I am still struggling to gauge where the market might move and I am wondering what key items to look for. With euribor for example I will look at the bund on a technical analysis aspect to see where that might go as it has a correlated effect on the euribor spreads. When trading euribor i will look for prices trading through a price ticker to see where big buying or selling is to try and gauge a move in the spreads but i still find it hard to gain a decent bias or feeling of where the spreads might trade next. Is there anything i am fundamentally missing?

A: What you are asking is effectively the holy grail of directional trading – what can act as a leading indicator for the product I am trading?There are no easy or formulaic answers to this – if there were, everyone would be a successful trader. Some traders use technical indicators, others try to analyse flow. Most Euribor traders follow the bund/bobl and schatz closely since all will be correlated with Euribor. However, the whole issue of leading indicators can be circular. I remember once asking a bund trader what they followed for direction. He replied t-note futures. I later asked a t-note trader what they followed. They replied bund futures!Spread trading is a little more detached from this – it’s all about the shape of the curve for intra contract spreads and influences like credit spreads for inter-contract spreads.

TED spread intraday

Q: I am interested if any of you has looked at treading US treasuries vs Eurodollars spreads intraday. I am specifically interested not in the short-term, classical TED that involves the front end of the curve, but more towards the blues and golds. Anyone has any experience in this? Any knowledge or recommendations? What can break the correlation between the blues and ZF? What should I watch for?

A: You have a couple of choices here.

– trade 5 year t-note futures against 5 yr STIR bundles. The 5 year bundles would include whites, reds, greens, blues and golds.

– trade forward starting term ted spreads. You could buy 5 year t-note futures, sell 2 year t-note futures in equal notionals and sell a STIR strip comprising the greens, blues and golds. This would be a more complex trade from the perspective of drivers. For example, repo would be a key determinant of the forward bond price (the 3 yr bond starting in 2 years’ time created by trading 5-year t-note futures against 2- year t-note futures in equal notionals)

STIR Market Conditions – Current and future (posted  Nov 12)

Q: I’d greatly appreciate your view on the current flat shape of the curves and what, in your opinion, will need to happen for expectations to start changing regarding interest rate movements.

Are we destined for flat curves and tight trading ranges within the stirs for years to come?

A: I think flat curves are here for a while. The Fed is probably on hold until early 2015 and its difficult to see why Europe or the UK might be much different.

I’d take a look at at Australian bank bills and Canadian STIR’s where there’s been more rate movement. Also remember that Eurodollars have been historically more volatile than Euribor and so the daily trading ranges might be better.

CME Eurodollar implied calendar “OUT”

Q: Enjoyed the book and the examples on implied pricing. Not sure whether these are the only examples for Eurodollar futures or just the simplest? 

Specifically, does CME generate implied prices “OUT” for calendars using butterflies and calendars? For example do they generate an implied price for the calendar H3-M3 using the butterfly H3M3U3 and the calendar M3U3. If so is this a visible implied price or an invisible second generation price?

A: Not as far as I’m aware. CME supports implied in pricing into butterflies and condors but this is from the futures strip and not directly from other spreads.

How can I Start Trading STIR Futures

Q: Just finish your book. Thanks for writing it.
I am completely new to STIR Futures Trading.
I am very interested to start practicing trading STIR Futures on my on my own account. Though I had finished reading your book, I am still quite clueless on how to make my first trade.

Please help me as I am very new to this.

My queries as follows:
1. What should I do to look for a possible trade? (I am more suitable to trade Spreads)
2. I understand that Calendar Spreads is the bread and butter for spread traders and can be traded using the yield curve. So which yield curve should I use and where can I find them and how do I use them?

Please advice me so that I can start practising and begin my learning process.

A: The best way to start is by observing price action i.e watching a market. If you have a price feed then that is best otherwise use the exchange website’s to get delayed prices.

Graph the futures series and build up an idea of how it moves and a feel for it’s dynamics. Eventually when you are ready, put on a small position and see how it goes and build your experience from there.

You can trade european, UK, US and Swiss short term yield curves via stir futures. They have similar characteristics and it’s your choice, maybe coloured by ease of trading access and costs.

Hope this helps.

1 month Calender spreads using CQG

Q: Using CQG Trader ( CO located)
I am wondering if money can be made at all by trading 1 month EURODOLLAR calender spreads or similar ( Not seasonal)

A: One month ED calendar spreads can be trading in the same way as three month calendar spreads except that you would be gaining just one months curve exposure rather than three. This means that they would be less volatile than a front month three month spread.

For example, if you were to buy a Sept/October spread, you would profit when the curve steepened between the Sept and Oct expiries whereas a Sept/Dec spread would profit from a steepening between the Sept and Dec expiries.

I think it is unlikely that they can offer any additional trading opportunities compared to the three months spreads, although they may be harder to get into and out of due to less liquidity.

Floor and Ceilings Prices for Stirs

Q: I would like to know if there is a upper and lower bound for what a Stir future can be priced at. Prices do obviously depend on supply and demand, however they are linked to the underlying interest rate. Theoretically the bounds should be observable. 

Suppose there is only one interest rate meeting scheduled before the contract delivery date. Banks might hike 25 bps or cut 25bps perhaps 50-75 in an extraordinary emergency situation.

EX: Suppose rates are at 1.00, and there is only one central bank meeting scheduled before the contracts expiry, is it reasonable to assume that an upper bound 99.25 and a lower bound of 98.75 ? Is there a spread between unsecured funds to account for like LIBOR-OIS? If that spread is +10bps historically on average, would it be reasonable to assume UB of 99.15 and a lower bound of 99.65?

A: It is possible to attach a theoretical range to a front month STIR future based on circumstances that you have described. After all, a STIR future is an implied forward rate that must settle to 3 month LIBOR/EURIBOR on the last day of trading. Generally that is why the front month has little volatility – it is already locking into cash and any unexpected factors outside those already discounted would move it significantly.

Impied IN vs OUT

Q: I am new to STIRS and was just reading up on implied quoting, in Aikin’s book.

I am a little lost on implied Ins & outs. In the example there is a 50 lot bettering the spread on the offer side of the spread @ 23 (see attached image). Does this imply out BOTH 50 lots @ 79 in H AND also 50 lots @ 55 in M?

If a trader lifts 50 lots at 23 what gets executed and who has priority, assume I am talking Sterlings on Liffe?

In the second example M/U spread it would have to imply out @ 54 on the M leg, the books sais it does not since 55s are bid already, would Liffe quote an extra 50 lot at 54 that is visible on the depth ? I am still unclear of what happens in this case and how it would execute if someone hit the 50 lot @ 17?

Suppose in the M/U spread implied out another 50 lots at 55 in M. would this extra implied quantity trace back to H/M and into H? Is this a second generation spread? I mean the M/U can imply M which can in turn imply in H/M and can even imply out to H, how far back to these implieds go?

Does Liffe Imply out butterflies to the outrights?

Obviously this type of information needs to be read and analyzed correctly if one wants to trade as it can affect your edge, in understanding if a spread is well bid/offered or not/When people might pulling orders to create panic/re(bidding or offering) and real vs fake vs implied. Looking forward to hearing from you, thanks.

A: This is covered in the book in pages 73-77 and shown in table 2.3

A H6M6 offer of 23 implied in a 50 lots of H6 at 79 and bid of 55 in M6. A trade at either of these price prices will trigger the spread trade. However, outright orders take precedence over implied in prices.

If a trader lifts 50 H6M6 at 23,  the spread is executed at 23 using prices of either 79 and 56 or 78 and 55 but no additional trades will be done in the outrights except for the volume prints at the above prices. The market would then revert back to 100 lots per side as per table 2.2

Liffe supports implied in and out pricing across the entire strip and spreads but not in butterflies or packs/bundles.

CME includes butterflies.

I dont get it. If I am looking at my ladders on X_trader implieds displayed will BOTH H and M show the the extra 50 lot at BOTH79offer and 55 bid ? 
If someone lifts the 50 lot @ 23 will I see a 50 lot print on the t&S in H/M and in H and in M? Still not clear on this. Thanks for helping out. I realize it is covered in the book, I just did not fully understand which is why I bring it up in the forum. There might be others that are confused on this as well. The forum post will clear it up.

If someone lifts 23s for 50 lots how does the exchange engine decide if it will do “either”
A) 79 (with the implied 50) and 56 with the 100 lot outright order
B) 55 (with the implied 50) and 78 with the 100 lot outright order

Also it is clear that one of those 100 lot outright orders will get 50 lots lifted out of it so how can the spread revert back to 100 lots, would it not end with either 1) 22/24 with 50 lot bid 100 lot offer or 22/24 with 50 lot offered 100 lot bid depending on which combination (A or B) it chooses from above?

The outright offer of 50 H6M6 at 23 should imply in 50 H6 at 79 and a bid of 55 for 50 M6.
If another trader were to purchase the 50 H6M6 at 23, the exchange algorithm would generate prints in the H6 and M6 outrights for outright trades at either 79 and 56 or 78 and 55. The trades in the H6 and M6 would be done with the actual bids and offers and not the implied in prices. Exactly which prices that would be used in this situation would be decided by liffe but they don’t make their algorithm methodology public.

Got it, thank you very much.

Range trading Bor & Eurodollar

Q: I wanted to ask you opinion on programming an automated trading system to trade the range on the STIR spreads. 

Are you mainly looking to trade a range with the STIR spreads and look for a reversion back to a mean price?

I do watch the STIRS and look for opportunities but as they are relatively slow moving and the spreads seem to trade within a tight range I am thinking that I could program the platform to follow a dozen or so calendars and execute orders based on a deviation away from the current range.

Does anyone do this successfully in the retail world? any feedback would be appreciated.

A: Mean reversion is often used in financial markets and STIR’s and can work well or poorly depending on how the underlying market behaves. Unfortunately, figuring out how the market is likely to behave is the tricky part.

Mean reversion can involve selling rising markets and buying falling markets. If the market fails to mean revert, the old trading phrase “picking up dimes in front of a steamroller” makes painful sense!

Profiting based on the netting price at open

Q: I have read your book and i think it was great. 

I trade at an arcade doing bund bobl schatz spreads, although now i want to get into the short end with EURIBOR.  

This question might seem odd and out of place, but a lot of the guys at my firm trade basically a lot on the open, and get into a calendar spread about one or half tick in the money straight away in the netting. They say that they have an idea where the bor should open, and sometimes it( one of the legs) nets ‘out of line’, so join the orderbook before market open, and then as the bell rings they are in both the legs say for eg long sep short dec, at a better price than market. 

Then they just hit the spread ladder and get out, or leg out. 

But when i ask a bit more in detail i get no reply saying there is not enough to go around. I totally understand this and have no issues, but just want to try my luck here. Would you be willing/able to share this method, basically how do we get an idea where the bor contracts should open? 

I know for the Bund bobl shatz is basically based on the T Notes. So if overnight T notes are up or down X number of ticks, bund should be about 2.2-2.3 x X, bobl about 1.5 x X and Schatz i forgot. There is a relation for Stoxx and S&P also, i don’t know it. 

Thanks in advance, looking forward to second edition 

A: Great question and a glimpse into what professional arcade Euribor traders are up to!

In the good/bad old days of floor trading, the Bund used to open before the Euribor which meant that the Euribor market had a leading indicator which helped set its opening prices. Nowadays, both futures open at the same time. The Euribor futures open at 7am (GMT) and the Bund at 8am (CET).This means that the Euribor does not have a leading indicator and so there is more adjustment in Euribor prices at the open to reflect the changes in the Bunds opening price.

I think the Euribor traders in your arcade know exactly what certain Euribor spreads are worth and where they have been trading and position themselves to leg into spreads on the open at advantageous prices, taking advantage of the fluid price adjustments reflecting changes in the Bund.

Gauging where the Euribor should open relative to changes in the Bund is very subjective and more of an art form than a science. In reality, bund movements should only have a peripheral influence, the Schatz being more relevant and short dated interest rate swaps rates even more so. The numbers you supplied are probably based on a regression analysis but will be flawed by their relevance to a historical data sample only and the fact that they don’t take into account changes in the shape of the yield curve. A proper study should regress Euribor futures to Schatz with more sophisticated methods including principal components analysis of Euribor spreads to Schatz/Bobl spreads.

Thanks for reply, I get the point of knowing what the spreads should be worth, as I dont think overnight a spread can really change so much especially if there is no rate news or such. Thus if one of the legs is netting far away to create a favourable price, then get in. 

I also did bit more of asking around, and  the reasons are similar to why sometimes the bund bobl schatz opens out of line, basically due to some paper/higher time frame traders/hedgers needing to do business with a time priority, not mainly caring about what exact price they get. I guess we intraday traders need to catch these edges!

Deposit rates

Q: Thank you for writing a great book, and I look forward to the second edition. My question concerns the spot deposit rates you discuss in the STIR Futures Pricing section. Where do I find these rates and is there a published standard? A search in Google for “deposit rates” returns many different results from individual banks offering retail clients similar but not identical quotes. The following links from The Wall Street Journal and Bloomberg list several possibilities: 

A: The rates referred to are inter-bank deposit and borrowing rates, from which a daily survey is taken of specified term and currency. This survey of rates is used to compile the LIBOR and EURIBOR fixings to which STIR futures ultimately settle.

TED Spread

Q: If you were going to trade the TED Spread would ER4 Euribor against the Shatz? Or what would you consider the best Euribor contract to use? I assume the same would be appropriate for Short Sterling?

A: ER4 would be better than ER1 but it is still a stack hedge and therefore you are introducing curve risk. A bundle would be better.

Cash Market vs STIR Market?  (Jan 2012)

Q: I have been using your book for some time now (very good) having been trading on the simulator with some success and I am now fairly comfortable in putting on each leg for a calendar spread.

 My aim is to get comfortable enough and get enough time to set up a basic spreadsheet to start trading Euribor VS Schatz.

 Having done a Masters in Finance and Trading I am very comfortable with the concept and valuations of Derivatives and risk concepts, but I am very curious to understand why if this market offers such a good risk/return profile (from my understanding) why larger institutions and Banks do not follow suit and allow their prop. traders to trade this market/strategy (as oppose to Cash Equity trading)?

 One possible idea I had was the reluctance and preferred concentration of prop. trading in markets for which Institutions/Banks (including why hedge funds do not soley trade spreads in stir futures) don’t Market-Make for, hence sticking to Cash Equities/Bonds?

Sorry lastly, what is your opinion is the best proxy in predicting IBORs? bank sector performance?

A: The Schatz/Euribor spread is a swap spread (aka treasury spread) representing the difference between AAA and AA rated credit. It is a closely watched spread and Banks have large exposures to it. They hold large quantities of Government bonds (AAA) as part of their tier one capital requirements but fund themselves at AA rates (in theory) giving spread exposure. Also their swap books are sometimes duration hedged using AAA rates bonds or bond futures, again giving spread exposure. Swap spread dynamics are multiple and technical influenced by the likes of mortgage hedging (more in the US) and even structured exotics hedging.

Perhaps many Banks don’t feel the need to add to their exposure by prop trading swap spreads but some might under the guise of hedging. Hedge funds actively trade swap spread since they are deep and liquid and move (these days). However STIR spreads are not really scaleable to HF levels.


Best indicators of Bank creditwortiness are OIS/LIBOR spreads but you need broker quotes via reuters or bloomberg to view. You can make a proxy by comparing EONIA with Euribor fixing from the web


Really do appreciate the reply, that was very kind of you and it was very useful.Could you elaborate on the details/example of what would be consisted in a UK/European bank SWAP book? 

Not sure I understand the question. A bank swaps book would be made up of different term IRS. British banks tend to have more exposure to GBP swaps, Europeans, Euro based ones.

Also, what do you search in bloomberg to find the OIS-Libor spread and how exactly the Overnight index swap rate is actually mechanically different to EONIA? 

EONIA is the actual overnight fixing. OIS are a mechanism to turn this into term funding, for example 3 months. A 3M OIS rate would be the weighted average of the compounded daily EONIA fixings over 3 months

Is the OIS-Libor spread an actual leading indicator and how strong have you found is its correlation to the AAA vs AA spread? 

Not really. Markets are so instantaneous these days. 3M OIS/LIBOR spreads are positively correlated to swap spreads but they are of different term. Swap spreads start at 2 years. 3M OIS/LIBOR are generally more volatile than 2 yr swap spread in present markets

Also, why (what is the rationale) for the front 6 month euribor contracts trading near ECB rate + EONIA and the latter months trade near the 2 year SWAP rate (which I understand to be the weighted average EURIBOR or treasury spot rate and future rates).

The white pack should be influenced by euribor forward rates (but the market is essentally disfunctioning) and longer dated stirs by swaps (the fixed rate on a swap is the weighted average of the forward rates). Bluntly, the 2 year swap rate should be similiar to the 2 yr bundle yield remembering that the swap will be quoted for t+2 settlement whereas the bundle will be forward starting thus giving rise to stub and maturity mismatchs. Basis is also prevalent in the realationship due to counterparty risk.

Again, sorry, could you explain why the difference in the INTER BANK OVERNIGHT RATE (e.g. fed funds, eonia) and the INTER BANK 3 MONTH RATE (of the respective currency) would represent the return required to compensate for the the level of credit risk in the respective company? I see the only difference being maturity: 1 day vs 3 months.

Both are unsecured but the EONIA fixing are referenced in OIS and a 3m OIS would be compared to 3m euribor, not EONIA/3m euribor which would be a term spread An OIS is often considered to have little or no counterparty risk due to its methodolgy so the OIS rate is more akin to secured borrowing rates (GC repo). The OIS/LIBOR spread is the difference between term secured and unsecured rates.

Euro LIBOR and EURIBOR difference represent?

Interbank daily fixings. Euro libor is done in london by the BBA and Euribor by EBF in frankfurt. The market references euribor fixings only. Differences arise due to methodolgies – Euro libor has a smaller panel of contributors which are considered more credit worthy at present than the larger panel of european banks used to construct euribor fixings. This gives rise to a small discrepancy between these rates but it is largely academic.

I suggest you read Interest Rates by Jha for a background to the above

Front month roll

Q: Hi there  just a quick one regarding  front  month   spreads  and specifically flys / condors.

Is it a safe assumption to make that  in the preceding roll period  that the front fly should tend  to sell off ( or  condor etc)  as  positions are rolled to the adjacent month.

Thus presenting an opportunity ( not always)  to  sell the front  fly/ spread etc and buy  the next  one down the curve .

I  am looking at my  market  SFE bank bills and have noticed  that this seems to emerge around  the  period  preceding  the roll.

A: It’s really determined by the shape of the curve. When positive there will be this effect, the extent to which will be determined by the steepness of the curve. However, the risk to this strategy is that the curve flattens or goes negative.

Implied Probabilities Mon Pol (FED,BOE,BOC,ECB)

Q: I was wondering how I might be able to compute the probabilities of monetary policy decisions for single meeting and future (multiple) meetings. Mainly for FED, BOE, BOC, ECB. 

I have not been able to find any good sources online, most point to binary options. This is an extremely illiquid market and provides a wide range of estimates, The probabilities seem to settle down closer to date of the decision. I am more or less not comfortable using this method. The Fed Funds Future also suffer from the same disease. I don’t even know where to start with BOE, BOC, and ECB.

I am looking for someone to help me out and point me in the right direction. If you know of any good sources or how to do the computations outright, please post in the thread.

A: STIR futures are not really applicable to backing out rate change probabilities. They reference LIBOR/EURIBOR which are interbank fixings (+ a ton of basis) and not Bank policy rates (only except being SNB which does reference 3M LIBOR). Most market users use meeting dated OIS swaps which are specifically designed for trading & providing market generated probabilities for policy meetings. They are observable on Reuters and Bloomberg and broker screens.

Is there a quick and dirty method to compute these probs that STIR traders use?  

I know the data is available on BBG and RTRS, they both have the functions programmed to compute these probs, but is there a way for a home gamer to compute these probs? Most Home traders do not have a Reuters or a Bloomberg terminal at home.

I personally wouldn’t use stir futures for this purpose but a rule of thmb is given in the book (page 37).

STIRS vs Bobl / Schatz and Bobl Bund

Q: What do you see as the advantage in trading STIR Spreads rather than Bobl Schatz / Bobl Bund positons? Bobl / Bund spreads. If you trade these in the right ratios i.e 8:3 and 3:2 respectively you can get out using the fly. I am actually interested more in trading STIRS but would like to know your thoughts as I just foresee more opportunities to get in and out of the markets using these spreads. 

A: STIR spreads are much less volatile than bobl/bund and schatz/bobl which may or may not be an incentive to you. Liquidity will be higher in the STIR’s but then that can be a barrier to trading the bid/offer.

Generally, the bond spreads/flys are all about macro curve trading whereas STIR spreads are more about rate expectations.

Tracking the colors

Q: I  am beginning to follow and trade calendars and flys in the CME GE market and was seeking out advice as how to gain a better grasp of the complex i.e. Whites thru purps. As you know there are as countless spread combinations, but mostly all the spreads in each year/color in a way basically chart the same. So, in an effort to avoid building & tracking say 25 red or green calendar combos that all look the same, I’m trying to find a more efficient way to track maybe 6 to 10 of the more important calendars to see where the opportunities are in the curve/complex. 

A: The 3M and 12M spreads are the most popular and liquid and will be most representative of the complex.

Short Sterling

Q: I have been trading Euribor for the last year and normally have the Bund chart up to give me a directional view further out on the curve. If i was to trade short sterling would i use the gilt chart to replicate this? Or what do you suggest if trading short sterling?

A: Yes but remember that the Gilt future references an underlying bond with a maturity between approx. 9 years and 13 years. What happens at the shorter part of the curve (covered by Short Sterling futures) might not necessarily mirror what is happening 10 years down the curve.

Might be worth looking at the short gilt which covers underlying bonds with a maturity of 1.5 years to 3 years. It does a little bit of business so should have liquid quotes. This would be almost equivalent to a euribor trader watching the schatz.

Thank you for your response much appreciated. Could you TED spread these two then, short gilt and short sterling? Like Euribor/Shatz? I know the TED is volatile at present but what would the ratios be?

Yes you could trade the spread and the ratio would be the DV01 of the short gilt future divided by £12.5 (DV01 of short sterling). It would very approximately be £20/£12.5 = 1.6 (exact process is detailed in the book)

Trading Platforms

Q: Any ideas of the best trading platforms to trade STIRS. I am using an ‘in house version’ based on TT X Trader at the moment but it has problems with freezes and display lagged price info. Its a front end platform and then routed via PATS. I have used TT X Trader on the SIM and its great to use but would have to subsribe to it and also pay my seat cost which includes the ‘in house’ platform so not very cost effective. I have also looked at easy screen but at £500 per month I might as well have TT. I have contacted a few people to see if can get a better deal than at present. I am paying £2.00 per RT and my seat fee but I could open an account with Velocity Futures and pay £2.32 per RT but get TT X Trader for free and on the amounts that I am doing would be more cost effective. Any suggestions welcome.

A: All commercial platforms are pretty stable and uniform these days. It just becomes a question of preference and cost. Personally I’ve never really got on with TT – I guess I’m not a ladder trader. I used rts and then ecco for years (now gone). I’ve never done a “free” software but pay via higher roundtrips deal, rather pay approx £1000 pm and circa 80p per rt. It just depends on what kind of volume you do.

If you really want to reduce costs, find a clearer offering PATS or easyscreen via the net and trade from home for around £500pm and 80p per rt.
Just don’t expect to be the fastest in town!

1 year calendar flys

Q: I have been trading  the STIRS  for 12 months now  but I am trying to  focus  in Longer dated  spreads . Whilst I  realize  the   volatility is greater in the 12month calenders   what are your thoughts on the 12 month  flys  where  liquidity allows you to put some reasonalbe size  on and run it for  day’s weeks months – are six  month red  onwards flys  good volatility capture trades  along various segments of the curve ? ,

I have  noticed in partucular  that  many  of the larger (  and most sucessfull traders in my market )  are trading  further out than say the  front whites . The market I am in rarely trades through and daily ranges across the strip are very tight. Thus the only way to  get fills is to leg it 9 times out of ten . this of course increases my execution risk .

A: Many successful spread traders concentrate on the back red and greens since vol is lower and it becomes a execution business (buying the bid, selling the offer). The one year flys are a liquid and popular trade but remember you are effectively doing a relative value trade of two adjacent segments of the yield curve in one year buckets, so these things can move when rates get going again.

New to Euribor

Q: I have been trading Euribor now for 3 months and am about break even on the P&L. I using spreads between ER2 and ER8 normally because these have the most movement and you have options of different stratergies etc. I am only trading a few lots at the moment but concentrating on the ticks rather than the money in the first year. My point is sometimes I am down to zero in the queue and trading is still going on at my price but I cannot get filled? Is this because my clip size is small? Many times I could have taken the halk tick but couldnt get filled and then had to scratch because the price has retreated. Spreads only get me the halfs each time but its steady away and learning all the time, any help appreciated

A: How do you know you are zero in the queue? Are you using PIQ by TT, if so this is only an approximation and an interpretation of LIFFE’s algoritm. There is no easy way around this – you could try bidding for more than you actually want (with the resultant fill risk) or enter several one lot orders to buy back a short one lot position and delete the other orders once filled. Note that this is technically not allowed by LIFFE but in small size it should go undetected but don’t take this as a suggestion or recommendation.

Schatz / Euribor (intraday)

Q: I’m new to the world of interest rate futures spreading, and was looking for some pointers as to which are some of the best spreads to trade on an intraday basis.

I normally trade intraday spreads within the European equity index futures, but now want to move into the world of fixed income.

I started playing with bund/bobl spreads recently and am having (limited) success with it, although I am trading this with a statistical/correlation based model and not the traditional DV01 ratio based spread that most people seem to use (although to be honest the ratios are always pretty similar).

I want to learn more about Schatz/Euribor, and in particular how to find which of the first 8 months is the most efficient hedge for the schatz.  I then want to go on and do some further analysis and work out which are the best 2 Euribor futures to use to hedge the schatz, and with which optimum ratios.  Any ideas how i can go about doing this??

A: Popular spreads include all stir calendars & flies, Schatz/Euribor, bund/bobl/schatz (spreads or flies). Lesser spreads include Short Gilt/Sterling, 3M OIS/Euribor, swapnote/euribor.

Using regression based hedge ratios is fine but make sure your data is clean and your daily settlement prices are taken at the same time.

Using bundles to trade the credit/swap spread between Schatz/bor is usually the best proxy. Stacks in the early/mid reds are normally very highly correlated with only the front month being inappropriate. You can also try strip optimisation techniques such as variance reduction or principal components analysis but they are subject to the usual vagaries of statistical analysis.

Calendar Spreads

Q: Hi, I’m new to spread trading and I have a few questions I’d like to ask.

I understand that Liffe has a time pro rata algorithm and a time priority weighting is given to orders over 50 lots. Does this mean that anyone looking to buy on the bid or sell on the offer has little chance of getting some of their order filled unless they are trading more than 50 lots?

I’m unsure about how the margins and commissions work for spreads. Are traders charged twice the commission rate for spreads? If a trader has a limit of 100 lots can they trade 100 spreads? Is margin set aside from the account for making a limit order?

I’ve been experimenting with matrix trading using a simulator. Is it necessary to use an autospreader or do most people trade calendar spreads manually? Are there still many opportunities in trading calendar spreads using the spread matrix? I’m wondering how the markets may have changed and how much capital someone needs to compete. When most people start trading a new market they prefer to start off with small size and I’m not sure if this is really possible in a pro rata market…

A: To answer your questions…

LIFFE use a pro rata algo wihich give preference to the first order making a new price in market size between 50 and 500 lots. If you join the bid or offer, then you are in a queue. With such liquidity in the markets, the days of buying on the bid and flipping it out on the offer are long gone!

Spreads and flies attract a much lower intial margin than outrights due to their lower risk. See LCH Clearnet for the latest margins (follow the links on liffe)

I wouldn’t use an autospreader in the front month anymore due to low latency traders dominating this space – the leg risk is too high. However, you can still leg the greens and trade the matrix in the late reds/greens. Many traders do just this and live off the rebates.

Can you make money in stirs these days? Many do but many others have tried. Only one way to find out.

Many thanks for your reply.

I’m still practising on a simulator and I’ve been thinking about what you said in your post (it took me a while to get used to pressing the right buttons!! Right button sell – left button buy 🙂

I would like to understand why it is only possible to trade the matrix in the late reds and greens. I am having success in trading the late white and early red spreads and flies but I think it’s likely to be different when I go live. I suspect that many of the fills I get on the simulator wouldn’t get filled in the live market so I’m trying to take this into account.

I understand that for the green months the exchange pays a higher rebate. I think this increases the reward to risk ratio. The late reds and greens are are also less volatile. To me it appears there are more “opportunities” in trading the late whites and early reds but I’m wondering whether it is too risky to trade these in the live market (given that the payoff is also less due to the lower rebate)… am I thinking along the right lines here?

I have heard about Euribor traders living off rebates. Does this mean that most or all of their profit is made up of rebates?

It is quite possible to trade the white spreads in a matrix but it is ultra-competitive (as are the reds and greens nowadays). Volatility generally decreases with term and so the green spreads move less than the white spreads and therefore attract less margin.

Many spread traders make little or no trading profit but live off the exchange rebates which are more generous the further down the strip you trade.

I’m not a great fan of simulators. As you point out, they often allocate a fill to you which might not have happened in real life. Also, they are often not reflective of real life trading conditions.

Buy and Hold Calendars

Q: I wanted to get your thoughts on a long-term strategy involving buying a one-year calendar at the far end of the range of Eurodollar futures, then holding it as it progresses along the zero yield curve, potentially to the final year where the difference between the two futures is greatest (and normally positive). Adding on to this would be creating a ladder of these spreads ultimately extending over the 10-year futures calendar. 

Example, the M8M9 is currently priced at about 0.13 and could be purchased and held to the final year for the M8. The M0M1 is currently about 1.05. As a subscriber to Moore Research Center spreads (copyrighted material), I have access to graphs showing the white June vs. red June spread in each final year back to 1983. In only five of the 27 years did the spread close less than 0.13, with the lowest level about -0.7 (an aberration). Generally, the spread closes just under 1.0 (reading the graph by eye), with values over 2.0 five times. Using the GE future with a multiplier of 2500, the gain for a spread opened at 0.13 and closed at 1.05 would be $2,300. Margin on the M8M9 spread is $100 in my account, and $400 for the M0M1. Thus, a large return on investment figured on the margin required to hold the position over time.

Potentially, you could buy more spreads early, sell portions off to maintain the same margin exposure, and hopefully capture incremental gains along the way. I’ve attached (hopefully) a weekly chart of the M0M1 spread to help illustrate.

I would very much appreciate your opinion on this possible strategy. Thanks.

A: An interesting concept, although based on the assumption that the yield curve is usually positive and exhibiting a steeper profile in the whites than the greens onwards.

This is generally true in normal market conditions. Investors expect to be compensated for term investments and much of the interest rate expectations is contained within the whites, hence the term structure.

In theory, the strategy should hold but I’d be concerned about drawdowns when the curve is negative and I suspect the returns might have been somewhat patchy from 2007 onwards when the yield curve has been switching. In small size, this might work but any application of leverage in order to get meaningful returns might result in some scary moments!

You might also want to look at butterfly progression – perhaps a lower risk version than the 1 year calendars.

How many months to include in a term spread

Q: Please can you clarify whether you would use 7 or 8 different expiries when the maturity of the CTD is only 2 days after the expirey of the 8th month. ie, is the bond cashflow largely included/replicated by the 7 month strip up to the end of the 3 months of the 7th month thereby meaning that using an 8th month (and providing an extra 89 or so days) will give an erroneous yield?

A: The main thing is make sure that your spread is DV01 neutral and then the cash flow mapping is secondary. Ideally 7 futures would be a better match, perhaps with a ratio in the front month to reflect the stub. However, 7 futures will preclude the use of bundles which will provide a tighter price than executing 7 futures at the bid or offer. Unless you are trading big size, a bundle will give a very close proxy.

Euro Ted Spread

Q: I’ve been looking at the Euribor Sep10/ Schatz Dec09 spread and noticed that the price spread is quoted/traded as 2*Euribor – Schatz and the ratio of lots is 4:5 Euribor to Schatz.

Do you happen to know by chance why these market conventions are as such?

A: This is a stack hedge whereby they have used a furthered dated euribor to try to capture the majority of the behaviour of the curve for the 8 contracts or so covering the life of the CTD underlying the Schatz. It works with acceptance of a higher degree of curve risk than by using a bundle or strip.

The 4:5 ratio is taken from LCH Clearnet as a hedge ratio. It would give you maximum margin offset if both contracts were listed and traded on the same exchange. In practice, we trade euribor on liffe, shatze on eurex so really it is just an approximation for DV01 neutrality. In small size it would work.

Return on Capital

Q: After a pretty decent career in equity derivatives sales-trading and broking, I discovered prop trading as my real passion and I’m currently attending a training program at one of the arcades (which I’m really enjoying BTW) specialised in STIR futures.

I recently bought and read your book, thanks for putting together such a fine product which, if successful, I might keep using as a reference guide for a long time.

I wanted to ask your opinion about an average return on capital for a “senior” trader in a mature market such as the STIR market.  From your experience, what kind of return can be generated with a £100k+ account over a year?

The Arcade that I’m at also trades energy futures.  Do you have an opinion for that market?

A: It’s pretty subjective. In the floor trading days when traders had a more significant edge, a ROC of 100% would be a (minimum) target. Nowadays, I think 100% return on 100k is certainly achievable but tougher. I suspect there are many stirs traders out there with a ROC of 30%-50%, translating to an net income circa £30k-40k pa but they are happy to trade rather than get a real job! Stirs trading is not usually scalable so the more capital you allocate to it, the less your returns.

Energy is much more volatile than stirs. Even the calendar spreads are  volatile being a function of interest rates (minor effect), storage (large) and physical market activity (large). It’s very difficult to get an inside track or feel for what is moving the market since information is asymmetric (the oil majors and physical traders like morgan stanley,GS) know what is moving the market because they are usually the catalyst (e.g Dec 08 oil contango due to use of floating storage assets).

Trading Flys

Q: I’ve recently finished your book and thought it was great.  I was just wondering how you decide if a Fly is worth buying or selling (or just getting on the bid or the offer).  I noticed on page 215 of your book, your fictitious trader looks at the sterling strip to see if there’s a “spread slightly out of kilter versus the others or some butterfly action stressing the futures strip”.  Could you elaborate on what he is actually looking for.

A: Butterflies, especially back (deferred) month ones move very little (see attached). A back red or green fly might have a yearly range of a mere 2 or 3 ticks. Traders are looking for abnormalities from recent price action. For example, if a fly has been trading 1.5’s for a week and it closes at 2.0 and that upward movement has been reflected in the adjacent flies, then that will attract attention because it is seemingly out of line. Traders would try to sell it 2.5 or more realistically at 2.0 and then buy the adjacent flies on the bids to overlay the position.

Fly trading is all about bid/offering, buying one cheaply against selling another & vice versa. It requires a lot of patience and inventory and being on the exchange ILP rebate schemes.

Spreads vs outrights

Originally posted on 6/11/06 by JH

Q: Why trade spreads when outrights are cheaper and move around a lot more?

A: Outrights are great to trade. They are both cheaper and easier to trade than spreads but they have the inherent disadvantage that they are more volatile. This means that the outright trader is much more likely to suffer large drawdowns or realised losses on their trading compared to the spread trader. It’s really a case of “horses for courses” and if you are already successfully trading outright futures, then there’s not much point in switching your trading strategy. However, I know many more successful spread traders than I know successful outright traders!


Q: ‘Lean(ing) against’ : although this is widely-used in trading and seems to have an intuitive meaning, could you define/explain it, please, perhaps with an example

A:  By “leaning against”, I mean the spreading process of bidding or offering one side against a price in the other. For example if H7 was 95.55 bid and 95.56 offered and M7 was 95.52 bid and 95.53 offered, then the H7M7 spread would be a maximum of 2 bid at 4 offered. It would be unrealistic to assume that it would be easy or possible to buy one month on the bid and sell the other on the offer or vice versa. The spread would actually be tighter in reality, for example 3 bid at 4 offered and a trader wishing to buy the spread at 3 might bid 95.55 in the H7, whilst “leaning against” the 95.52 bid in M7. If they were filled in their H7 bid, they would sell the M7 bid or even pre-empt the whole thing by selling out the M7 bid first and then working the H7 bid.