Not quite liquid enough: NI , VX

General discussions about futures.
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sluggo
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Not quite liquid enough: NI , VX

Post by sluggo » Wed Feb 11, 2009 12:00 pm

Fulfilling a New Year's resolution, I added a bunch of new futures markets to my trading portfolio in early January. My brokers were enthusiastic about some of them, neutral about others, and negative about a few. I decided to trade them all, and see how it worked out. Empiricism in action.

In two cases, I've decided it didn't work out. I'm dropping them immediately. Enough data has been collected, the experiment's over, the conclusion has been reached: Vamanos.

The first one is CBOT 10-year Interest Rate Swaps (link), CSI symbol "NI", CSI commodity number 679. Slippage was bad, liquidity was spotty, filling the orders was a hit-or-miss proposition. (as the brokers had predicted last month).

The second one is futures on the VIX index, at the CFE (link), CSI symbol "VX", CSI commodity number 919. In this case, slippage and fills were sometimes good and sometimes not. But when they raised the tick last week, from 0.01 to 0.05 (thus making the minimum possible slippage $50), I decided not to play in that particular casino. Let them achieve wild success and everlasting fame, without me.

On the other hand, I'm either pleased, or else very pleased, with all the other new markets I added. In particular I'm just delighted with the Swedish S-30 Stock Index futures traded at OMX, CSI symbol "O30", CSI commodity number 956. If you're feeling adventurous, and if you've got USDSEK currency conversion data so you can backtest a contract denominated in Swedish Krona, give it a try!

Asamat
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Post by Asamat » Wed Feb 11, 2009 3:30 pm

Thanks for sharing your experience.
Asamat

alp
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Post by alp » Wed Feb 11, 2009 6:57 pm

Just out of interest, sluggo, apart from liquidity do you also choose instruments based upon volatility of contract value?

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Post by rhc » Thu Feb 12, 2009 1:03 am

Hi Sluggo,

From your experience, do you feel that these more ‘obscure’ (or perhaps, not as well known) markets make better candidates for systematic trading?
I have not studied this (& I may be way wrong here) but I am thinking that due to mass public participation in markets such as S&P, T-Bonds, Currencies, Energy & Metals markets etc., these types of markets (maybe?) might be more prone to higher volatility, false moves & less directional trading than the more ‘obscure’ markets that have less public participation. (naturally you wouldn’t want it too ‘obscure’ as you may not have the necessary liquidity)

Anyway, just wondering if you have any opinions and/or observations based on your experiences to date.

Cheers,
Paul

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Post by adamant » Thu Feb 12, 2009 3:02 am

RHC:

That is an interesting question.

There is some academic literature suggesting that certain types of technical indicators work better in markets that are not the most liquid. At the same time, we depend upon sufficient liquidity to trade "safely" of course, but this is a point to consider. Can we strike a balance?

Depending on your size, markets that are less liquid and traded may be better suited for technical/statistical systems as these ar elikely to be less efiicient. Anecdotally, I have noticed this in work related trading on a technical basis in small caps on the norwegian and swedish stock exchanges. Systematic trading is also less common in these markets.

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Post by sluggo » Thu Feb 12, 2009 1:31 pm

There are lots of testable hypotheses in the area of portfolio composition. In my opinion, a GREAT research tool is the portfolio scrambler drop-in for Blox, contributed by Jake and Nickmar viewtopic.php?p=22321&highlight=purpose ... ndom#22321 .

With this blok installed, you could run your system on (let's just say) 1000 different portfolios of 25 markets, randomly chosen from a universe of 40 "Old And Big And Familiar" futures markets. Then you could run your system again on 1000 different portfolios of 25 markets, randomly chosen from a different universe of 40 "New or Upstart or Overseas or Just Plain Weird" futures markets. Compare the median performance (500th best out of 1000) of the Familiars, versus the median performance of the Weirdos. Compare the 10% points of the distributions. Listen to what the data is telling you. (It might even be screaming).

Maybe you'll want to try a third run of your system, on 1000 different portfolios, but this time each portfolio consists of 12 randomly-chosen Old Familiar markets plus 13 randomly-chosed Weirdo markets. Now you can do a 3-way comparison.

For those who believe in the Markowitz Free Lunch called Diversification (specifically, that a collection of low- or negatively-correlated equity curves, put together into a Suite, has a higher (gain/pain) ratio than any of the constituents), the New or Upstart or Overseas or Just Plain Weird markets would appear to be a godsend. Their correlations to the Big Old Familiar markets, are quite low. So they provide lots of diversification, a very delightful state of affairs.

Some Weirdo futures contracts do appear to be traded by a very different set of demographics, than the people who trade CBOT 30 Year Bonds. One example is stock index futures on the national stock index of smaller countries. (Such as the AEX index futures which represent a basket of Dutch stocks, traded in Amsterdam.) Or the KOSPI, or the OMX S-30, or the SAFEX All-Shares, or the MSCI Singapore Index, or ... you get the picture. Lots of local traders only trade futures on their nation's stock index, skewing the demographics away from big funds and CTAs and banks. Whether that makes these markets better or worse for system traders, is a very good question :D

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Post by rhc » Fri Feb 13, 2009 9:14 am

My current belief system does indeed support the “Markowitz Free lunchâ€

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Post by alp » Fri Feb 13, 2009 7:24 pm

Charlie Wright:Most definitely. The major assumption that trend-following managers made in the last 30 years has been that a diversified portfolio of non-correlated futures markets lowers risk. Our research confirms that in the last few years, all the world’s futures markets have been correlating to a high degree - especially the daily volatility. So the basic supposition for portfolio risk control that managers have based their systems on for the last 30 years may be obsolete. You can see the difference in performance between managers that have grasped this change and those who have not.
We have two clear trends, quite mature ones: the globalization of communication and also of systematic trading. The once mostly US-dominated hedge fund or speculative industry is not anymore. While the assets at the hands of professional (systematic ?) traders keep growing, the number of individual investors or traders are certainly not at the same speed. Even individual investors and traders are turning to systematic trading, thanks to on-line forums like this and software like Trading Blox Builder.

This is a very interesting scenario: trillions and trillions of money at the hands of traders sitting tight waiting for the next "market inefficiency", trend, whatever. This certainly deserves a whole new thread and reminds me of Jim Simon's quote: "Speculation comes in and destroys trends. I am a speculator. It accelerates the trend. It gets you closer to the truth faster."

With regard to "Weirdo" markets haven't you ever found one that even though being "weirdo" reminds you of something "old and familiar"?

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Post by RedRock » Sat Feb 14, 2009 2:16 am

alp wrote:
Charlie Wright:Most definitely. The major assumption that trend-following managers made in the last 30 years has been that a diversified portfolio of non-correlated futures markets lowers risk. Our research confirms that in the last few years, all the world’s futures markets have been correlating to a high degree - especially the daily volatility. So the basic supposition for portfolio risk control that managers have based their systems on for the last 30 years may be obsolete. You can see the difference in performance between managers that have grasped this change and those who have not.
We have two clear trends, quite mature ones: the globalization of communication and also of systematic trading. The once mostly US-dominated hedge fund or speculative industry is not anymore. While the assets at the hands of professional (systematic ?) traders keep growing, the number of individual investors or traders are certainly not at the same speed. Even individual investors and traders are turning to systematic trading, thanks to on-line forums like this and software like Trading Blox Builder.

This is a very interesting scenario: trillions and trillions of money at the hands of traders sitting tight waiting for the next "market inefficiency", trend, whatever. This certainly deserves a whole new thread and reminds me of Jim Simon's quote: "Speculation comes in and destroys trends. I am a speculator. It accelerates the trend. It gets you closer to the truth faster."

With regard to "Weirdo" markets haven't you ever found one that even though being "weirdo" reminds you of something "old and familiar"?
Monkeys always seem to think them selfs smart for their times. And yet fail to be timeless wijg

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