In ch 19 Harris distinguishes between fundamental and transitory volatility. Fundamental volatility is due to unexpected changes in the fundamental values of instruments, and transitory volatility is due to impatient traders trading market orders. Bid/ask bounce is a form of transitory volatility. When you see bid/ask bounce in a market you’ll see the prices at the top of book tick up,down,up,down constantly, usually in a one tick range.

A good place to observe this in fixed income is Eurex futures. The front month contracts for Schatz, Bobl, Bund and Buxl (2,5,10,30 yrs) are the most heavily traded contracts in the Euro rates world. A lot of the trades on these contracts are hedges on cash bond positions. The traders hedging their cash  positions will take whatever prices are showing at the top N levels in order to hedge, so they match Harris’ characterisation of impatient market order traders.

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Some time ago JP proposed that all systems could be reduced to four aspects or capabilities: syndication, search, fulfillment and collaboration. At the time I thought it an interesting point, but not one that applies to etrading systems. Today I found myself reading Harris chapter 19 on liquidity. Harris characterises liquidity as the object of the bilateral search in which buyers and sellers look for each other. Which reminded me of JP’s point, and prompted the thought that ECNs like Liffe, which are organised as electronic limit order books are indeed search engine. They’re constantly performing a highly constrained search for matching orders.

So let’s have a go at mapping JP’s four pillars to etrading…

  • Syndication: market data syndication as per Reuters
  • Search: exchange order matching, or systems that reaggregate liquidity fragmented across multiple venues
  • Fulfillment: T+2 – what else !
  • Collaboration: squawk boxes, IM, Bloomberg chat

Swaption straddle

March 25, 2007

A swaption is an option to enter into a swap at some future date. A payer swaption is an option to pay the fixed rate, and a receiver swaption an option to receive the fixed rate.

A straddle is an option trading strategy that involves buying a put and a call at the same strike. If the underlying goes up, the call is profitable. If it goes down the put is profitable. If there’s little price movement the premiums likely constitute a loss.

A swaption straddle is a payer swaption together with a receiver swaption. If floating rates go up, you chose to pay fixed. And if floating rates go down you chose to receive fixed. And if rates don’t move, game over !  Would you like to play again ?

VC8 XLL

March 25, 2007

So if you’re building an XLL in VC8, and you’re using a .def file to specify the exported symbols, make sure you give the linker a /DEF:myaddin.xll switch. Unlike the VC6 linker, VC8 doesn’t automatically pick up the .def. Took me a good few hours to figure that, using depends and filemon to look for missing dependencies etc. All the time depends was telling me that my XLL was exporting no symbols, but I couldn’t see it, so fixated was I on more subtle possible problems.

The extra include directories one adds working with a large C++ codebase in Visual C++ were a real pain in VC6.  The project settings had a small one line edit field. Often it was easier to ctrl-C/ctrl-V to a real editor to change the include path. Now VC8 has added a little ellipsis button at the end of the edit field which brings up a nice dialog, rather like Tools/Options/Directories always had. So simple, but it makes so much difference to working in the IDE.