As I mentioned in my last entry, I’ve finally found a place where I can enter GTC inter-city spreads. The timing is perfect as a) I can test Nov ’11 spreads that will expire in 8 days, and b) open interest in Nov ’11 is 65 contracts. My hope on the latter is that some of those people has long and short exposures and might consider unwinding versus a spread order.
For now, my focus will be to concentrate inter-city spread orders on 1) the Nov expiration cycle (as that’s where open interest has concentrated), and 2) on spreads using the CUS contract as one leg. I think that these contracts sometimes suffer from an excess of trading opportunities (and trading hours) and so I think that a focused roll-out is better to test interest than offering intercity spreads across all contract expirations. (BTW- I hear that the CBOE seems to be taking the same approach in choosing to roll out a nationwide contract first. My hope is that in having a nationwide contract on the CBOE (for RPX), and a nationwide contract on the CME (for Case-Shiller), that the addition of inter-city spread orders will allow those looking for regional exposure to link (albeit with basis risk) the two markets).
As with all rules, I am open to exceptions. While my focus will be on November expirations, I hope to quote the front contracts. My sense is that in having intercity spreads on front contracts that traders can have the option of unwinding their outright exposures in the CUS market, and then zero out their regional versus national (CUS) exposure over time.
The other exception that I looking to make is to see inter-city markets develop within California. I’ve long argued that the wider spreads in the back contracts for SDG, SFR and LAX are function of risks unique to California (e.g. Earthquakes, water, and local politics/economy). My hope is that an interest will develop in the inter-city, intra-state spreads of LAX v SFR, SFR v SDG and LAX v SFR.
This table shows both spread quotes, the components of the two legs, and the synthetic quotes on the three Northeast regions for the Nov ’11 expiration. Note how the -15/-12 quote for CUS/NYM X11 is tighter than the synthetic quote (the one created by combining outright bids and offers) of -18/-9. The -12 offer could be broken down into a simultaneous sale of CUS at 156, with a purchase of NYM at 168 –levels both inside the outright market quotes.
If interested in hearing more, or discussing specific quotes, please feel free to contact me at firstname.lastname@example.org.