Carbon Emissions – ICE

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AFJ Garner
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Carbon Emissions – ICE

Post by AFJ Garner » Tue Oct 28, 2008 4:42 pm

My broker says the contract is illiquid. December 2008 is trading roughly 4,000 to 5,000 a day at present and December 2009 around 1,000 a day. The question is how much of this is put throughs, exchange for physical and so forth.

I had a helpful conversation with ICE but got no overall feel for typically how much of the turnover is "genuine".

Any views? Anyone trade it? No particular need or reason to but it is always helpful to keep an eye on up and coming new contracts.

sluggo
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Post by sluggo » Tue Oct 28, 2008 5:23 pm

It appears that ICE in the US provides a more detailed breakdown of trading volume ( https://www.theice.com/marketdata/nybot ... Results.do ) than does ICE's European Climate Exchange ( https://www.theice.com/marketdata/settl ... s/main.jsp ). That is a shame, because the US data tables let you see at a glance, the proportion of EFP's, block trades, and so on. Cotton example attached.

Remember that a slow system whose average losing trade is (-5.0 * ATR) and whose average winning trade is (+13.0 * ATR), will be more suited to a "less than perfectly liquid" market, than a quick system with (-0.5 * ATR) losers and (+1.3 * ATR) winners. (Why? Because a realistic upper bound on slippage is around 1 * ATR. Subtracting 1 ATR from all wins and all losses slightly wounds the former, but completely destroys the latter.)
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ICE_US.png
sample of Volume report from ICE US
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AFJ Garner
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Post by AFJ Garner » Wed Oct 29, 2008 4:42 am

What very useful tables - for the US markets at least. I suspect that MF Global are merely trotting out old information they have not bothered to update for this relatively new contract.

There is no symbol for it on MTrade and my broker told me that their risk management department needs to give permission to trade it, which I asked her to seek.

I also asked her to get the risk management department to update their views since I can not believe that more than, say, half of the volume is in block trades or whatever. According to ICE, there are now quite a few "market makers" or at least liquidity providers involved as well as speculators and end users.

I always find myself slightly nervous taking on a new market but as you say, a long term system can certainly absorb more slippage. And with "genuine" volume of even 1,000 a day, I can't believe one will not be able to unwind a position.

sluggo
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Post by sluggo » Wed Oct 29, 2008 8:45 am

AFJ Garner wrote:And with "genuine" volume of even 1,000 a day, I can't believe one will not be able to unwind a position.
Yep, I tend to agree (for a small position).

By the way I found it to be quite a useful exercise to ask myself "How liquid must a market be, before I will trade it?" and then follow up with "What do I mean by liquid, anyway?". One of my criteria was daily volume of the front month contract (not Total Volume), and there were others. It was a happy little day trip along the path of self-knowledge, to decide what other criteria (if any) I demanded, and why. It's also illuminating to ponder what criteria not to use, and why not. I think there may even be some "edge" here, at least for certain kinds of trading.

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Post by AFJ Garner » Wed Oct 29, 2008 11:14 am

Good thoughts.

Incidentally, that ICE page was most useful on the currencies. I had not come across it before. I see those cross rates are almost all exchange for physical, which is a pity. I suppose one is left with doing those trades in the forex markets.

I had a come back from MF Global just now: much as I had assumed, they had just not kept up with the market for this relatively new contract on Carbon Emissions and they agree that there is pretty good volume in the December contracts.

According to ICE there can be volume in the March contract but most of the volume is in December since that is when the producers have to comply with the carbon emission regulations – IE at the year end.

Ouch, that sort of information is beginning to sound almost fundamental.

Demon

Post by Demon » Mon Nov 17, 2008 8:31 am

As well as running a managed futures fund I also trade carbon derivatives for our climate business. The volumes are growing significantly and at times there is real liquidity. It all depends on your size really, you'll never have a problem trading 10-20 lots but if you're looking to move 1000+ then you have to try and trade when you can - not when you have too.

We have just introduced this contract into the investment universe for our fund but one thing LTTFs should be aware of is that the Dec 07 fell to 0.01 due to an over allocation of permits during Phase I. Now we are into Phase II of the scheme (2008-2012) and permit allocations have been cut significantly it is highly unlikely that you will see that again. I for one didn't want our systems using that data and decided to wait until there was sufficient price history from the Dec 08 contract in our continuous contract for our model not to look at any Dec 07 price history.

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