Day Trading & Forex Forum

arabianights

I feel like writing about how I trade STIRs intraday. Unfortunately, I am extremely lazy and hate explaining stuff (way off the scale in fact - my appallingly full private message box is a testament to this). So I am going to add to this in drips and drabs over the next month or so and may never finish it - it's going to be very long. Heck, I might not even bother to make another post in this thread. There is also a sticky in this forum with a link to my STIR chatroom, which although only a fortnight old is going pretty well during market hours. There are also plenty of spreaders and such like there who have a very different style to me, so if you're interested, especially if you trade them yourself, I would encourage you to check it out

As that rather disjointed first paragraph shows, I am also not the best writer in the world and tend to go stream-of-consciousness. If this is a problem, please re write all my posts for me in perfect English.

The purpose of this thread will be to explain how I would go about trading STIRs from the order book and the order flow (that is to say the trades that actually occur). I am going to focus on short sterling although there is nothing special about that market, and indeed these ideas can be extrapolated to bond futures as well but it is my belief you would need market profile or similar to do that successfully.

Firstly, let's discuss price making or price taking. To say the least, tickwise STIRs do not trade much of a range intraday and therefore the spread (although usually one or half a tick in the more respectable contracts) is a major factor in the costs of a trade. You could consider these over all transaction costs, entry costs, or exit costs but I would prefer to consider them the latter.

So the advantages of price making are pretty obvious: You earn the spread, or at least do not have to pay it. There are essentially two disadvantages, the first also blindingly obvious: no trade is guaranteed to even occur. To me, this is no disadvantage, as the one aim of trading is to avoid blowing up. The second is also obvious to anyone who has been trading for a while but in my view is far more serious, and it is that when you do trade someone has decided to pay the spread to trade with you and there is a very good chance that they have a good reason to do so. If that is because the spread is unimportant to them (for whatever reason) then great. On the other hand, if it generally is then you are probably in some trouble. You don't have the chance to pull your offer just because you don't like the trade.

Thus, the decision about price making or price taking, like so many things in trading, comes down to the risk of taking on a horrible unexpected trade versus the reward of earning the spread. And my next post, whenever I make it, will examine this further.

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Only morons take my advice!

Chatroom for STIR traders - open during UK market hours (7am-6pm). Anyone welcome, especially locals, IB/HF traders, brokers (particularly if you have lots of flow ), those with an interest in this field...

clbfjc

good post like to here more sir.

arabianights

I've rather changed my mind about price making/price taking, I don't think that it would be appropriate to introduce it for a bit. I will be adding to this thread later today, but first thought I would link to this rather worrying blog post. The analogy, here, is that a local is doing pretty much the same thing as the quants in this blog, except we're doing it (mostly) from our guts. I hope the implications are obvious.

__________________
Only morons take my advice!

Chatroom for STIR traders - open during UK market hours (7am-6pm). Anyone welcome, especially locals, IB/HF traders, brokers (particularly if you have lots of flow ), those with an interest in this field...

elitejets

Brilliant article from my favourite blog.

oiltanker

i remember reports out of NY in dec that people were buying 'atomic' puts [ie worse case view] as insurance. and sure enough the stock markets dived another leg down.

it would be interesting to know if atomic puts were being bought again.

GammaJammer

It is a very interesting read, but I do tend to take these things with a bit of a pinch of salt these days. While the analysis may have validity, you really cannot extrapolate 100% from those kinds of stats, as the data is so sparse.

Interestingly enough, I was speaking a couple of months back to the head of fx trading for a high frequency trading company (who also traded other products) and he told me that they had an absolute banner year in 2008, at a time when other firms were cratering. Guess it depends on how you're set up. But in FX (I can't speak for other products with any authority), there is a really marked blurring of the lines nowadays between liquidity providers and liquidity users. Price makers and price takers. In the old days banks were price makers, everyone else was a price taker (bit simplistic, but you get the gist). Nowadays this really isn't the case, and the big funds are waking up to the need not to just be a drain on the market that they access. And not just for cost benefit reasons either (although, as arabian quite rightly pointed out, it's far better to earn the spread than pay it).

All this has come about basically as a result of the information revolution in the last ten - fifteen years.

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"That which doesn't kill me makes me stronger"