Japan futures, contract lifetime liquidity distribution...

General discussions about futures.
leslie
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Post by leslie »

Hi Eric,

You have two separate postings, the second clearly shows the structural mechanism the Japanese use to guarantee themselves a profit.

1st Question:
"If I'm understanding you correctly, you are suggesting that Japanese traders are somehow participating in the interest rate differential between the Yen and some other currency by holding positions in Japanese futures contracts, that are priced in Yen?"

Well, yes, but this is an add on to the basic spread trade.
Carry trades are generally implemented as spreads since this lowers margins. Also, in general, these trades pay off due to very high leverage and remain 'risk free' so long as the underlying assumptions or existence of structural barriers can be guaranteed.

Simpler answer is the "lick the Postage Stamps" line. Since short term money carries near zero yield in Japan this is a way of collecting signifiant time premium.

Part 2 of One: "And it has something to do with the term structure of these futures contracts not being priced at "fair value"? "
Yes.
Although, seriously, what is 'fair value' naive off exchange traders play against a price fixing cartel. Cartel members run the exchange.

The exchange rule book is pretty clear--there can be no 'fair value' even at the daily price movement lever either since:

(a) you have to submit your trade hours before the session to be eligible for order matching;
(b) you are filled at discretion;
(c) order matching is discretionary, manual and rules are NOT published and NOT disclosed;
(d) limit orders do not have to be filled even if price trades through--yes TRUE!
(e) any order which was NOT submitted for the pre-session order matching *may* be treated as a market order any time during the session or it may *not*. :-)
(f) settlement prices of spot month contacts are established by "special quotation" only.

'Special Quotation' means a you are allowed to serve the Settlement Committee with a quote request and they have the right to respond at their discretion. You are not allowed to appeal the Committee decision. (It would seem wise to liquidate your position so you would not have to ask.)

Your Second Posting:
"It looks like the exchange forces people to overweight their participation in the deferred contracts via position limits. Any idea why?

http://www.tge.or.jp/english/contract/c ... zuki.shtml
"

As answered above, or if you prefer The Eagles, Hotel California

"’relax,’ said the night man,
We are programmed to receive.
You can checkout any time you like,
But you[r cash] can never leave!"

L
ecritt
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Post by ecritt »

Fascinating insights; thank you.
leslie
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Post by leslie »

You are welcome.

L
sluggo
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Post by sluggo »

Assume what Blox calls "100% slippage" -- your buy orders are always filled at the "high" (regardless of order type or order price) and your sell orders are always filled at the "low". Total Slippage for the round trip = 2 x DailyRange.

In one possible scenario, your trading system's average profit per trade is much much greater than 2 x DailyRange (perhaps because on average it holds trades a long long time). In this scenario, 100% Slippage is unwelcome but not fatal. Perhaps your gut feeling or your backtest results will tell you that the benefits of extra diversification outweigh the costs of abnormally large assumed-Slippage, thus it's preferable to trade these markets rather than not trade them. Perhaps.

Your trading suite might include several different trading systems, each with its own portfolio. The portfolios might or might not be identical. Systems which hold trades a comparatively short time and use stop orders to enter with-the-prevailing-wind, could possibly trade a small subset of the markets traded by systems that hold trades for months and have entries & exits which are smeared across several sessions (1/4 at the open, 1/4 at the close, 1/4 at day2 open, 1/4 at day2 close, and so forth).

You may decide that system A should only trade markets that have properties J, K, and L; while system B should trade markets having properties L, M, and N. You might further decide that systems C and D should trade all markets.

If you are contemplating trading ideas such as these, I suggest you consider using finer granularity than merely dividing markets into two groups: (Japanese vs non-Japanese). You may decide, for example, that "markets traded via EFP orders" deserve their own category, or that "forwards markets settling on a Prompt Date" deserves a category, or that certain individual markets/exchanges are sufficiently unique to warrant separation into their own container (EUREX?) It's an opportunity to use your daily logs of trades, fills, slippage, and trader remarks, to influence and guide research directions.
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