Houston TX
Legendary Market Wizard
Experience: Advanced
Platform: TT and Stellar
Broker: Advantage Futures
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
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So in the energy markets, we have benchmark contracts, and then other products trade at a differential to the benchmarks.
For example in Crude Oil the benchmark contracts are Brent (European North Sea) and WTI (US Midwest). If you want to buy a Nigerian Crude Oil Cargo it will be priced as Brent +/- differential. If you want to trade Mars (a US Gulf crude that comes onshore mostly in Louisiana) it will commonly be priced at WTI +/- differential. Even things like Gasoline or Heating Oil are traded as a (crack) spread to Crude Oil, especially on a longer term basis. In Natural Gas the benchmark is the Henry Hub price in Louisiana and all other locations are traded as basis differentials to that price. Hence if you want the price for Natural Gas in Boston you take the Henry Hub Benchmark and then add the Algonquin (the major pipeline in New England) Basis price to get the final price.
This raises the question. When your trading RTY should you be trading it as an an outright price, or should you be trading it as a spread or ratio to a larger benchmark such as the S&P500.
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