Rate traders: how do you generate trade ideas?
This is a question I've always wondered. In equities investment, I can see how you can gain an edge over others by reading the 10-k and footnotes more carefully or by talking to the management.
But in a macro product, let's say Interest Rate Swap, how can you develop your distinct view on where the LIBOR is going? Everyone has access to the same economic data and research reports. Unless you have some genius proprietary model, I can't see how you can gain an edge over others in the market.
Please help me out. I am interning at prop rates trading desk, and when asked my question, the traders just tell me that they create their distinct views based on market experience and instinct. But this answer really doesn't assure me. Any input is appreciated. Thanks in advance.
Let me speak about my own way of doing it...
Personally, I very rarely come up with a trading theme/idea on the back of reading some random piece of news or an Economist article. Mostly, things come up as you observe the mkt day in, day out. If you do that consistently and patiently, with time you will get a sense of there occasionally being something "out of whack". These instances could sometimes be "embryos" of a viable trade. With time, having looked at these "embryos" enough, you amass an arsenal of "tricks" and a knowledge of where and how to look. This could be what the traders you asked were referring to.
Thanks for the elaboration. Let me follow up with some questions. When you say something is "out of whack", do you mean the market is temporarily inefficient and creates an opportunity for you? How do you detect theseout-of-whackness (comparison with historical price, technical indicators, whatnot)?
You say you look for embryos of trades, and probably only a small fraction of those become viable trades. So it might take a whole day to find a good trade? For reference, the trader I shadow makes 1-3 IRS trades a day. His style is simply making directional bet on the benchmark rate and using a low leverage (x2 at most). No flattener/steepener, no basis, nothing fancy. But he's always watching the futures market on bond index.
On the topic of watching the market day in day out, I actually cannot do that because the traders use phones or IM another trader/broker asking for price, so there's no live price screen for IRS tha I could watch. Same for the repo traders.. Any way I could do to gain IRS//repo market experience in this situation?
I was under the impression that swap traders are in the business of taking spread risk. The Treasury guys take duration risk. So I'm guessing your swap trader is watching the swap market and the underlying futures market (take a look at how swaps are priced) and looking for discrepancies between what he thinks the rates should be versus what rates are being quoted. If he sees something he likes, he's probably executing a swap spread, which would explain why he's always watching the futures/cash market. But, I could be totally wrong and your guy could just be taking punts on the swap rate.
Yes, you could say that the mkt is creating an opportunity. The way I detect these things is by knowing the few particular mkts I trade inside and out. For example, I trade TIPS. This entails me knowing every single bond (there are 38 of them, incl 7/14s), observing how they behave on a daily basis, what the curve does when the mkt moves etc. As a result of this experience and, obviously, after a lot of trial and error trades, you end up with two things: a) a "radar" screen that allows you to detect dislocations; and b) a set of heuristics that allow you to critically examine the opportunities. I don't really use technicals.
Yeah, it could maybe take a day to find a good trade, but that's probably in overkill territory. Most trades would probably take a few hours. As to the trader you're shadowing, that's an entirely different kettle of fish and a strategy that I, in my particular setting, simply cannot use.
You don't have access to any live pricing screens? For an intern on a prop trading desk, this is, in fact, suboptimal. You might wanna find out if there's anything you can do about this, e.g. put some spreadsheets together that would allow you to see things, etc.
Regarding gaining repo market experience, obtaining a live feed might be tricky. I'm sure whoever helps with the funding at least has the morning average repo rates for various issues. Honestly, looking at intraday repo price action will probably not be too helpful - in this ZIRP environment repo mkt rarely responds to macro news on intraday basis. Instead, it might be better to understand who the major participants in the repo market are and why they are using repo. For example, in the repo specials market, on-the-run issues trade rather predictably throughout the auction cycle, why is this? By all means if you have the data, use it to aid your understanding (and do yourself a favor and look at term rates, not just overnight). Also I would bet that the guys who do stuff with treasury futures on a regular basis know repo extremely well.
PM'd you.
Things are not that different in a "stable" rate environment, as far as I am concerned.
Interesting to hear that it won't be much different Martinghoul. Is it because the direction of rates change is known? would be great to hear from you!
No, it's just that the fundamental dynamics are never that different, IMHO...
Brings back memories. Nothing says "Surprise MUTHAFUCKAS!!!" like a surprise rate cut.
Interest Rate trade ideas (Originally Posted: 10/14/2010)
All,
Will be interviewing for rate products.
Besides, short 2Y/long 5Y 10 Y. UK Guilt/UST, Germand Bund/Irish Bond long TIPS.
What other trade ideas will you suggest/ think of?
many thanks,
If you can talk about those in detail, including carry, you should be fine.
Know of any resources that explain carry well?
its Gilt, not Guilt
there's no u
can anyone comment on how quantitative rate traders generally are?
you are an idiot if you go long any treasuries
elaborate? or is this the same old," rates are at their lowest ever so they can't possibly, every, conceivably go lower" argument
if u have been long this year you are a very rich idiot.
Saw this MS research the other day on zero hedge: http://www.scribd.com/doc/39071633/QE-or-Not-QE
Gets into fixed income outlook (i.e. the US is Japan) and talks about the best butterfly to maximize rolldown+carry ... long 5s on 2s5s7s.
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