When you’ve been wrong, there’s no sense hiding as sooner rather than later the world will know. I have been working with (and have previously touted) an incorrect understanding of inter-city spread trading that I now need to reverse.
Inter-city spread trades work! One can enter an inter-city spread trade at a level, and if the level is matched a spread trade will result.
Yesterday an inter-city spread order that I had entered (offer of CUSX12/CHIX12@ 45.2 ) was executed as another trader lifted that spread offerering. Somewhat similar to a calendar spread, I am now short an additional CHIX12 and long an additional CUSX12, while the other side has the opposite positions. (I’m still reviewing how the trades impact volume and open interest as yesterday’s trades were recorded as volume of two, while a calendar spread trade would show four.)
(As an aside, inter-city spreads “worked” before in that they may have improved a quote on one side of a trade. I’ve seen inter-city spread orders executed in the past when each leg was better than the outright quotes in the two legs of a trade, but yesterday was the first spread order that was executed as a spread in recent memory).
Net, now that inter-city spread trades “work” there is the potential to open up new areas for trading, particulary within regional areas (e.g. the three west coast, or three northeast contracts) where the correlation across regions might be very high and traders want to opine on differences going forward. (Note to self, need to test/blog).
The table above shows six working inter-city spread orders on the two contracts with the greatest open interest (CUS and CHI). I’ve included implied levels for each leg to help traders visulize how these inter-city orders narrow the effective bid/ask spreads on each leg. The implied prices on the inter-city spread orders are within the bid/ask spreads of the outright CUS and CHI market. (In fact, outright bids and offers were improved on three of the six outright quotes this morning as a result of these orders.)
I’m open to teeing up other “pairs” trades if there’s an inter-city market that someone wants to see quoted. Please contact me at email@example.com