Prop trading plan (calling exp STIR traders): Could I REALLY have an edge with this or am I utterly deluded?
Background: late 30s, decent economics degree, read up on banking/trading at uni, interned IB, never got hired, went into another field of gambling, did ok. Now semi-retired.
The plan: sit on a beach. Trade short sterling interest rate futures. How with no background in biz?
- got access to Bloomberg.
- no clients/management/office politics to worry about.
- read every BoE publication cover to cover. All MPC chat obviously
- read every UK rates strategist cover to cover.
- always buy on bid and sell on offer ,- never cross the spread.
- ave trade hold time: 1-3 weeks.
- if you thought market was correct, hold no position. (No risk manager or line manager to pressure you to add risk).
- if you thought market had over reacted to incoming piece of data (or was positioned one way) build a position without crossing the spread.
Could this work? Do you believe anybody can have a long term edge playing as liquid and efficient market as Short sterling outright? (No options or spreads - just outright directional bets on levels of different contracts hiking/easing pace).
Do you know of any real person who has achieved this long term, betting their own money not just on a 2/20 heads I win tails the client pays instead of me setup?
Do you think it would be theoretically possible or a fantasy like an day trader who thinks he can win long term betting S&P futures?
You would definitely have some advantages over an HR PM or BB rates trader I feel; no office politics, no irritating client positions to manage, no annoying risk/line manager. A pure contest of wits.
Presumably there is a fair bit of ,"loose" soft corporate swaps hedging money entering this market which would not necessarily be ultra sharp and could get one matched when trying to build a position on one side of the market?
But could you win long term? Perhaps trickiest of all, even if you were winning (or losing) how many years would it take to know if you had just got (un)lucky or actually had an edge?
If you are holding for 1-3 weeks. Then Why do you care about crossing the spread. That alone tells me you have no idea what you are doing. If you are concerned with bid ask spreads then you are talking about sub 5 min positions.
You can make a little bit doing this. If you know what you are doing. But fixed income is probably the worse market to trade right now. You might as well trade cryptos because the volatility is so much better.
+1 on the time frame.
+1 on Fixed Income being tought right now.
To what extent is it fair to stay STIRS are a futures product which can be traded virtually in isolation without too much reference to other markets on a relative value basis?
Or if you are trading any other market it is probably priced off / correlated rates, but in a way STIRs aren't really that interested in other markets, except maybe RV between different expiries, they are really a pure directional bet?
Let me ask a question, a UK short sterling prop trader; apart from monitoring the prices of his own market, what other markets would be most important to him and in what order? (Is if he had to trade blind with access to quotes from only 1/2/3/4/5 other markets, which markets would it be and in what order?
Maybe....
1) gilts 2) cable 3) eurodollar strip 4) euribor 6) ftse Us 10 year S&p
Is this order correct to you think?
"If you are holding for 1-3 weeks. Then Why do you care about crossing the spread. That alone tells me you have no idea what you are doing. If you are concerned with bid ask spreads then you are talking about sub 5 min positions."
Respectfully, I am not sure I agree with this. Across 1000 trades crossing or not crossing the spread could easily make the diff between viable / non viable biz model.
On short sterling a trade might only move 8-15 ticks over three weeks. In this context how crossing/not crossing spread not be a huge factor in performance?
Then look at different markets. Any market that has a 1-3 week holding period and requires you to squeeze bid/ask spreads sounds like a horrible market. Not to mention you have unexpected event risks. If profit potential is 8-15 ticks and you are holding overnight. Sounds like months of good trading could be wiped out by one headline.
You need to find a firm to work for. You have zero idea how to evaluate risks/reward at this point .
Of all the things to trade, you've picked short sterling!
It might work for you, but it's difficult for me to imagine how it can happen.
Martinghoul can you elaborate on why you put short sterling at bottom of the list for you and why so hard time in long term? Too slow moving a market? Too f dull for you to trade constantly? Too efficient? Too many people looking for same edges? chose it to match a personality type; analytical, less relative value or speed/reaction time; more tactical / time to weigh entry/exit, better at putting probabilities on non-maths real life, reading between the lines. For me STIRs look from outside like probably the purest most intellectually stimulating global macro market; nothing commodity/equity specific, even FX quite flow / carry influenced by comparison. No credit influence. STIRs about as pure a global macro bet as you can find with less polluting external influences to interfere with decision making and bets?
Firstly, short sterling is a relatively less liquid mkt than, say, Eurodollars and Euribors. Secondly, it's prone to bouts of extreme overreaction, which, depending on your strategy, might be a good or a bad thing. Thirdly, in the absence of macro volatility (once Brexit is done and dusted, one way or another), there isn't a reason to expect a lot of volatility, which means that your hopes of making 10 ticks on a trade in a few weeks might be frustrated.
Finally, of course there are tons of people looking at the mkt and trying to squeeze something out of it. Whether that makes it more or less efficient is a rather existential question.
P.S.: it's incorrect to say that STIRs have no credit influence. After all these are LIBOR futures. LIBOR has a credit component and it occasionally moves (for instance, in Eurodollars these past few weeks).
Thanks for this Martinghoul - very interesting. "short sterling is a relatively less liquid.. . Secondly, it's prone to bouts of extreme overreaction" Any chance you could flesh out the extreme overreaction idea? What do you think might cause this? Any chance of a specific example? How often would you say you have observed this phenomenon? Has such an overreaction caused you to put on a trade in the past and if so could you give an illustration, if you did not mind, of how precisely you expressed your view in the market? I guess your assessment implies that somebody who knew what they were doing (doubtless not me as a novice) could have a decent edge as market inefficient? Finally you suggest this extreme overreaction could be a bad thing, depending on strategy; again would you mind expanding how this could be bad? I guess if you were running tight stops and were taken out on an overreaction move?
To what extent do you think with the information sources above do you think you could be on an informational level playing field with institutional/hf participants in this market?
I guess I am thinking of the Fed leak inquiry and ECB breakfast meetings nods and winks to market participants. (I guess I have a romantic idea the B of E is very gentlemanly and doesn't behave like this)
Were these incidents one offs and pretty much it would be a fair fight, or to what extent would one be going to gunfight with a knife trying to play this market off only the well known public sources and no "expert network" retired MPC member access etc?
You will never be on an informational level playing field with institutional mkt participants. If you think that the "loose soft" flow will offer you any edge, you should just forget that idea. End user mkt participants don't get any of that juice in this day and age.
As to BoE being more gentlemanly, maybe, that's true to some extent, but there's a lot of access and soft information that people in the market get. Whether it's helpful is another matter.
So the answer to your question is that it depends. It's a function of your strategy, your capacity for risk and drawdown, etc etc etc. I would just advise you to be very conservative and start with a healthy amount of skepticism.
There are a lot of highly paid professionals with wrong theories on monetary policy/rates. The institutional edge isn’t that great. A guy like warsh nearly got the top job at the fed and he hasn’t gotten one monetary policy decision correct and his entire model of how the economy works is false.
Martinghoul - have you actually observed traders who you believe actually have a long term edge making vanilla directional rates bets, or is market just too efficient? Maybe these guys win on their RV trades and just break even on the gambles into CB announcements long term but it satisfies their craving for action? Or do you believe STIR contract pricing can deviate significantly from fair value for times? I remember late Nineties in the pits it sometimes took half an hour for the contract to complete its sell off after a market moving event; presumably the market adjusts instantly now but maybe it sometimes revises it's opinion and comes back for a second look 20 minutes later? You can sometimes anticipate that?
those 20 minute moves from the 1990's now take 20 seconds...if that. you are deluding yourself. Take a look at a 1 minute candle chart on a normal trading day...and try to paper trade the market in realtime. Its free to paper trade. good luck
You can have edge making long term vanilla directional rates bets, but you need to have deep pockets.
why not just trade ZB (30yr T Bond futures)...much better economics
Facilis in amet officiis sapiente accusamus et. Consequatur voluptatem nobis voluptas omnis laboriosam.
Excepturi sequi et quisquam non ut. Laborum aut commodi maiores aut est esse officiis dolorum. Asperiores rerum vel quia. Ut autem qui ut architecto. Qui ut facilis odit explicabo. Voluptatibus dolor totam mollitia et ducimus sit eius. Sint qui nostrum architecto dicta minus tempora quia ipsa.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...