While I agree that refiners will optimize both crude supply and the product slate made it's not as precise as you imply. Refineries are very complex machines and no two are the same. To make the picture more complicated some of the crudes you mention (BonNy Light for example) don't have forward financial markets and almost all the products made don't have liquid forward markets that would allow you to arbitrage in the way you imply. Sure if a distressed cargo comes on the market which returns a better yield a refiner will try and sell the supply they have and acquire the new cargo. They will also optimize the cuts/product mix to max the value of the products they yield. Finally in my experience, many refineries are in separate divisions/companies to the trading arms, and have their own trading groups. These groups are often not as good as the trading arms (because comp is lower) and in some cases their own trading arms even take advantage of them.
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Sorry I'm no expert in crude but the friend I mentioned who started a hedge fund two years ago told me that the technology of each of those refineries is exactly the same and he's been designing over 500 of them. As in the margin they make my refining a certain type of oil.
His strategy is much more complex than what I summarize, my point was that the degree of institutionalisation in the trading described is quite high and that was just an answer to the question "what are some pros out there doing".
Last edited by wintergasp; October 2nd, 2016 at 06:58 AM.
Use cheap but perfectly usable software (like eSignal) which can chart every single exchange traded spread out there - then use these as your building blocks for other spread types (flies, condors, double flies, etc)
One can use said software to chart exchange-tradded flies and condors but there won't be enough volume day to day vs charting 2 exchange traded cals against each other (e.g. CLM7:CLZ7 - CLZ7:CLM8) to create a synthetic
Use a real FCM with the minimum acceptable being IB (their margins have issues further out however) but preferably one of the more well known Chicago shops so as to get margined correctly per what the exchange dictates
It seems that some people also think spreads are mainly about deleveraging or constructing "mini"-variants of outrights to make them more controllable and while that may be a function for calendar spreads specifically (it's evident in correlation to front month), it's not the only thing going on. One will typically find a spread to a: have less range but trend smoother than the outright, b: greatly reduce or cancel out systemic shocks that affect the outright instrument (e.g. USD risk), c: if traded at higher time frames require less day to day monitoring (technically not specific to spreads though), d: allow other markets to be created along the curve rather than being limited to the outright.
Deep markets for spreading: Brent, Gasoil, Natural Gas, WTI, Eurodollars and the entire rate complex in general (of which things like treasuries will be about inter and not intra-spreads).
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Spread trading has come a long way. I started my career over 25 years ago quoting Eurodollar spreads in the CME pit before moving to a an upstairs trade desk when I spent considerable time rolling positions by trading calendar spreads or legging them. The tools that are available now are stunning and really make spread trading an incredible place to be.
If anyone is interested in learning about some of the tools available, we, Trading Technologies, have a page on our website dedicated to spread trading and you're welcome to look at these tools. You may also PM me with any questions or post them publicly here in the forum.
Some relevant points made here. I'll share a thought, perspective of someone who trades almost exclusively calendar spreads but mostly from vantage point of a liquidity provider..
Spreads are great for a few reasons: generally boring, slippage estimates are reasonable, scalability, strategy generation is fairly straight-forward. Cons have been well represented in other replies, the greatest of which is 2x fees. I believe the benefits are still great, and if I were to find myself in a retail position I would still be trading spreads. I would be very choosy about my products. For instance I would not trade the 1 month WTI or Brent calendars but instead the 3, 6, and 12 month calendars. Soy would be almost exclusively july/Nov spread. I would stay away from markets where there are too few participants (coffee and cocoa were mentioned and I've been there, done that. Add cotton and sugar to that list..). I would spend time looking at trend following strategies on the front natural gas spread as RB and perhaps HO. Note those last two have very small tick sizes and are a bit more thinly quoted so have to be conscious of potentially greater slippage and much higher costs. I do not like LE/HE buy maybe the high vol makes them decent candidates for overcoming the fee disadvantage. There really are a lot of starting points. Spending some time creating a fee/ticksize/vol metric and using that to find potential contracts to trade is a worthy time investment.
A personal opinion to be taken with a large grain of salt: deep fundamental knowledge of products does not pay off for most traders. There is too much that can go wrong and you then need to specialize which likely doesn't lend itself to longevity. Understanding current events and what's likely to cause large changes in volatility is important, but reading crop reports and paying close attention to rig count numbers is best done by sell-side analysts.
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