{"id":500,"date":"2019-08-30T13:57:09","date_gmt":"2019-08-30T13:57:09","guid":{"rendered":"https:\/\/www.stirfutures.co.uk\/?p=500"},"modified":"2019-08-30T13:57:12","modified_gmt":"2019-08-30T13:57:12","slug":"july-24th-2019-euribor-z0h1-spread","status":"publish","type":"post","link":"https:\/\/www.stirfutures.co.uk\/?p=500","title":{"rendered":"July 24th, 2019: Euribor Z0H1 spread."},"content":{"rendered":"\n

A strip of Euribor futures are derivatives on sequential forward\nstarting inter-bank offered rates. As would be expected, each Euribor future is\nhighly and consistently correlated with its adjacent contracts.  For example, a Z0 future (expiring in December\n2020) might be \u224898% correlated with the H1 (March 2021) contract.  <\/p>\n\n\n\n

This stable relationship between adjacent contracts make\nspread trading in the form of calendar spreads (future1 -future2) or butterfly\u2019s\n(future1- 2x future2-future3) very popular as a low volatility trading strategy\nalbeit often requiring high leverage in order to generate enough return.<\/p>\n\n\n\n

It is difficult to imagine how Euribor futures could ever\nbecome negatively correlated to each other but as is often with risk, reality\ncan be stranger than theory. This happened once in my trading lifetime in 1999\ndue to a phenomenon subsequently called the millennium fly<\/em>. This was\nwhen the Z0 (December 2000) futures sold off sharply (implied forward rates\nincreased since stir futures are quoted on a 100-r basis) whilst the adjacent U9\n(Sept 1999) and H1 (March 2001) contracts continued a upward trend (implied\nforward rates decreased) in line with other interest rate related product. This\neffect was later attributed to a US bank allegedly being refused access to\nfunding markets in the new millennium for being deemed to be non-Y2K compliant.\n <\/p>\n\n\n\n

This effect of Euribor futures becoming negatively\ncorrelated has happened again for the first time in 20 years (to my knowledge).\nDuring the 2019, up until 24th<\/sup> July, the Z0H1 (December 2020-March\n2021) spread traded in a range of 0.02 to 0.07 with an average daily spread volume\nof \u22484000.\n<\/p>\n\n\n\n

During normal trading hours on 24th<\/sup> July, the\nZ0H1 spread had traded between 0.02 and 0.03, but from 17:25 hrs to 17:37 hrs\non the same day, blew out to 0.14 and then traded back down to 0.03 by 18:37pm on\na volume of over 90,000 contracts. This was driven by aggressive buying of \u224860,000\nZ0 contracts from a price of 100.565 to 100.640 whilst the H0 sold off from\n100.535 to 100.510 on volume of \u224828,000 during the same time period (17:25\nhrs to 17:37 hrs).<\/p>\n\n\n\n

The charts below graphically display the moves in the both the spread and the individual futures contracts, highlighting the temporary enforced negative correlation between Z0 and H1. Charts by Reuters Eikon.<\/p>\n\n\n\n

\"\"
Z0H1 Spread: 24\/07\/19 Tick data, Price and volume<\/figcaption><\/figure>\n\n\n\n
\"\"
Z0 (top) and H1 (middle) futures:
24\/07\/19 1 min data, Price and volume (Z0 bottom) <\/figcaption><\/figure>\n\n\n\n

This was probably a very expensive 12 minutes from the\nperspective of proprietary traders and the instigator of the trade. The adverse\nmark-to-market on leveraged short Z0H1 positions might have led to proprietary traders\nbuying back short spreads to reduce inventory but thereby exacerbating the\nmove. Whoever or whatever was behind the trade would have ultimately lost money\nsince the spread and the individual component futures contracts subsequently\nnormalised back to levels seen earlier in the day. Given that none of the\ntrades violated the Exchange\u2019s tolerances and circuit breakers, all trades stood,\nand none were cancelled.<\/p>\n\n\n\n

The move defies logic. The next day (25th<\/sup>) was an\nECB policy meeting day but rates were unchanged and there was no market moving news\nregarding QE policy. The move was measured in minutes, not milli-seconds,\nperhaps ruling out a fat finger or flash crash. Someone might have a very\nspecific idea regarding European rates in Q120, but it was awful trade execution\nto achieve it. Market manipulation? Isn\u2019t the idea the make money from that.\nThis trade would have lost the instigator money. Focus will probably fall on an\nalgorithmic error, but the reality is that we will probably never know for sure.\n Maybe it\u2019s a sign of age but when things\nlike this happen, I\u2019m glad that I\u2019m no longer in the game!  <\/p>\n","protected":false},"excerpt":{"rendered":"

A strip of Euribor futures are derivatives on sequential forward starting inter-bank offered rates. As would be expected, each Euribor future is highly and consistently correlated with its adjacent contracts.  For example, a Z0 future (expiring in December 2020) might be \u224898% correlated with the H1 (March 2021) contract.   This stable relationship between adjacent […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-500","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/500","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=500"}],"version-history":[{"count":1,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/500\/revisions"}],"predecessor-version":[{"id":503,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/500\/revisions\/503"}],"wp:attachment":[{"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=500"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=500"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=500"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}