A trade should be based on an assumption based on facts
- Joined Mar 2008 | Status: Taking Care Of Business | 5,587 Posts
Hear the music before the song is over ...
- | Joined Jul 2013 | Status: Member | 1,494 Posts
A trade should be based on an assumption based on facts
- Joined Aug 2013 | Status: Going with the flow | 244 Posts
Hello everyone, hope you are all well!
Following Skenobi's adivce, I would like to ask a few questions to our institutional trading community and would love to get each of your views on some of the tactics dealers and traders use.
First of all, let's talk about FX dealer/trader risk managing tactics. From my understanding, when liquidity dries up and hot potato trading kicks in, dealers look to hedge positions to prevent losses. They do it in a number of ways, but I think you guys will hedge with other instruments such as FX options, futures, forwards, swaps. Then in turn the options writers will hedge their positions back in spot. Please correct me if I am wrong.
1. So swaps are basically simultaneously buying and selling in spot and forwards, so I'm guessing you guys didn't actually use swaps since you're already getting put into positions from clients. When you have a position open, a swap would basically add to that position and hedge only whatever is added. Is this true or do you also manage risks with swaps? And if so, how?
2. I believe "risk-free" assets are also another hedging instrument for dealers, such as treasury bonds. How often would you guys hedge in bonds and are any other assets also used like equities or no?
3. From what I understand, dealers take bad positions from clients and hold it until price returns. Once price turns and comes back up/down, dealers exit. This strategy is known as dollar cost averaging and allows the dealers to take positions against the flow yet close them at good prices. When price is going against you and you're getting put into bad positions, are those positions hedged completely or do you let the positions keep building without hedging and wait for it to come back? (I know sometimes price may not return for a long time especially during volatile news, but I'm sure dealers would be aware of what is pushing price and base decisions on that. I just want to know if your positions are almost always hedged.)
4. I know in the past dealers would hold positions they think are good without hedging them and try to make a profit on the side, my guess is for better bonuses. Is this common even today?
5. Is there any way to plot other FX instruments (forwards, options, etc.) besides Spot on a chart? Can the different greeks be plotted on a chart? If so, how would you go about doing that? This would allow you to see stop hunts when price shoots up or down and the other instruments stay the same or go the other way, no? From what I understand, people who engage in stop running will take a position in spot and hedge with options, so basically if stops are above the spot price you would go long spot and simultaneously short in options, which creates an arbitrage opportunity for spot traders. Is this a false belief?
6. Do you guys have your own way of differentiating real and fake breakouts? I know some compare the major pairs (GBP, JPY, EUR, AUD, etc. vs USD) to tell if it is real or not. You may not want to share your exact strategy, but could you tell me if you use spot FX like I just mentioned or share what markets/instruments you use? (This question may not apply to those who have retired from institutional trading and are now trading higher TF, however it's meant to be asked about your dealing days).
7. What exact securities do dealers hedge in on an intraday basis? I have seen good correlation between 10Yr. US Notes and USD. I know correlations will not always hold, but they can definitely be a good tool to measure money flows.
8. When you guys hedge positions, do you unwind each legs at different price points? For example, if you're net short at a top, but hedged the position, would you close the hedge and then wait for price to come down before closing out the position?
So another thing I am trying to understand is a good way to gauge price movements as well as momentum. Right now I measure pip movement versus time.
9. Is there a better way to tell momentum is increasing/decreasing? (I know you can see it visually as well with a moving average, but is there a better statistical method?). In your opinion, do you think you need a better method?
10. Dealers are usually engaged in short-term counter trend trading against the flow, rather than chasing price. Basically when price moves it leaves behind a "liquidity vacuum, gap, black hole, etc". Do you guys focus on these liquidity holes to guage where price wants to go next?
Thank you guys! This was posted rather quickly so if anything doesn't make sense please let me know.
Following Skenobi's adivce, I would like to ask a few questions to our institutional trading community and would love to get each of your views on some of the tactics dealers and traders use.
First of all, let's talk about FX dealer/trader risk managing tactics. From my understanding, when liquidity dries up and hot potato trading kicks in, dealers look to hedge positions to prevent losses. They do it in a number of ways, but I think you guys will hedge with other instruments such as FX options, futures, forwards, swaps. Then in turn the options writers will hedge their positions back in spot. Please correct me if I am wrong.
1. So swaps are basically simultaneously buying and selling in spot and forwards, so I'm guessing you guys didn't actually use swaps since you're already getting put into positions from clients. When you have a position open, a swap would basically add to that position and hedge only whatever is added. Is this true or do you also manage risks with swaps? And if so, how?
2. I believe "risk-free" assets are also another hedging instrument for dealers, such as treasury bonds. How often would you guys hedge in bonds and are any other assets also used like equities or no?
3. From what I understand, dealers take bad positions from clients and hold it until price returns. Once price turns and comes back up/down, dealers exit. This strategy is known as dollar cost averaging and allows the dealers to take positions against the flow yet close them at good prices. When price is going against you and you're getting put into bad positions, are those positions hedged completely or do you let the positions keep building without hedging and wait for it to come back? (I know sometimes price may not return for a long time especially during volatile news, but I'm sure dealers would be aware of what is pushing price and base decisions on that. I just want to know if your positions are almost always hedged.)
4. I know in the past dealers would hold positions they think are good without hedging them and try to make a profit on the side, my guess is for better bonuses. Is this common even today?
5. Is there any way to plot other FX instruments (forwards, options, etc.) besides Spot on a chart? Can the different greeks be plotted on a chart? If so, how would you go about doing that? This would allow you to see stop hunts when price shoots up or down and the other instruments stay the same or go the other way, no? From what I understand, people who engage in stop running will take a position in spot and hedge with options, so basically if stops are above the spot price you would go long spot and simultaneously short in options, which creates an arbitrage opportunity for spot traders. Is this a false belief?
6. Do you guys have your own way of differentiating real and fake breakouts? I know some compare the major pairs (GBP, JPY, EUR, AUD, etc. vs USD) to tell if it is real or not. You may not want to share your exact strategy, but could you tell me if you use spot FX like I just mentioned or share what markets/instruments you use? (This question may not apply to those who have retired from institutional trading and are now trading higher TF, however it's meant to be asked about your dealing days).
7. What exact securities do dealers hedge in on an intraday basis? I have seen good correlation between 10Yr. US Notes and USD. I know correlations will not always hold, but they can definitely be a good tool to measure money flows.
8. When you guys hedge positions, do you unwind each legs at different price points? For example, if you're net short at a top, but hedged the position, would you close the hedge and then wait for price to come down before closing out the position?
So another thing I am trying to understand is a good way to gauge price movements as well as momentum. Right now I measure pip movement versus time.
9. Is there a better way to tell momentum is increasing/decreasing? (I know you can see it visually as well with a moving average, but is there a better statistical method?). In your opinion, do you think you need a better method?
10. Dealers are usually engaged in short-term counter trend trading against the flow, rather than chasing price. Basically when price moves it leaves behind a "liquidity vacuum, gap, black hole, etc". Do you guys focus on these liquidity holes to guage where price wants to go next?
Thank you guys! This was posted rather quickly so if anything doesn't make sense please let me know.
- Joined Oct 2007 | Status: Former institutional dogsbody | 1,253 Posts
The answers below are based on my own experience. Naturally, other bank traders will have their own opinions.
When I wanted to prevent losses, I cut my positions. I don't hedge.
REGARDLESS of what they were originally designed for, FX options (along with futures, forwards, and swaps) are trade-able asset classes in their own right. Speaking only for myself, I trade them. Nothing wrong with using them to hedge, but only noobs use them ONLY to hedge.
If not for trading, I use FX swaps to routinely manage contract delivery date mismatches. "Manage risks with swaps"? Don't know what you mean.
I traded Treasuries and bonds on their own. I never used them to "hedge" anything else. Traders who run "investment" books with a longer-term outlook (as opposed to short-term prop books like mine) will have their own hedging strategies.
Speaking only for my own ops: My dealers don't have time to manage sour positions assumed from clients. We cut them so we have time for OUR OWN sour positions. 
As for keeping our positions "always hedged", we have stop loss orders for that.
I'm not sure how you KNOW this. Anyways, I don't care what my dealers do, as long as they're not losing money and stay within assigned risk management parameters.
You can plot anything you want plotted. Any standard Bloomberg terminal can do most of what you want. Whether you would find any trade-able info is debatable. "This would allow you to see stop hunts"? MY EYES can already tell me that, thank you very much.
Yes. Let me say again: I don't use options to "hedge" any damned thing. In running stops, good ol' stop loss orders or mental stops work well enough for me. I don't know anybody who uses options to hedge stop run ops. It's the weirdest thing I ever heard.
ANYBODY with eyes can see what real and fake breakouts look like; they're as plain as day on the chart itself. I suspect your real question is whether we had any way of PREDICTING when a real/fake breakout is about to occur in the immediate future. The answer to that is: NOT without inside information as to the firepower and psychological will of the traders behind the orders against which breakouts occur.
Disclaimer: I personally have not gone out of my way to use inside information and/or try to predict fake breakouts for a long time before I retired. I didn't need the inside info then... don't need it now.
No, I do not use spot in the manner you described.
If you "see" good correlations, good for you. Trade them then. As for using Treasuries to measure money flows, I don't know how it's "definitely a good tool", but if YOU know, then good for you too. You may refer to my prior answers on my simplified way of looking at things.
I would unwind positions based on my estimation of the strength of supports and resistance along the way. No other way to describe it other than that it's based on "feel" developed on long periods of observation.
If measuring stuff helps you make money, all power to you, my friend.
No.
(No I don't think so.)
And no, in my opinion I don't need a better method.
REALLY? "usually engaged"? That's news to me, mate.
I suspect we focus on these "holes" (as you call them) because price tends to go in the direction where there's least resistance.
We look at whatever timeframes we're interested in.
(Read the thread again.)
First of all, let's talk about FX dealer/trader risk managing tactics. From my understanding, when liquidity dries up and hot potato trading kicks in, dealers look to hedge positions to prevent losses.
They do it in a number of ways, but I think you guys will hedge with other instruments such as FX options, futures, forwards, swaps. Then in turn the options writers will hedge their positions back in spot. Please correct me if I am wrong.
1. So swaps are basically simultaneously buying and selling in spot and forwards, so I'm guessing you guys didn't actually use swaps since you're already getting put into positions from clients. When you have a position open, a swap would basically add to that position and hedge only whatever is added. Is this true or do you also manage risks with swaps? And if so, how?
2. I believe "risk-free" assets are also another hedging instrument for dealers, such as treasury bonds. How often would you guys hedge in bonds and are any other assets also used like equities or no?
From what I understand, dealers take bad positions from clients and hold it until price returns.....
As for keeping our positions "always hedged", we have stop loss orders for that.4. I know in the past dealers would hold positions they think are good without hedging them and try to make a profit on the side, my guess is for better bonuses. Is this common even today?
5. Is there any way to plot other FX instruments (forwards, options, etc.) besides Spot on a chart? Can the different greeks be plotted on a chart? If so, how would you go about doing that? This would allow you to see stop hunts when price shoots up or down and the other instruments stay the same or go the other way, no?
From what I understand, people who engage in stop running will take a position in spot and hedge with options, so basically if stops are above the spot price you would go long spot and simultaneously short in options, which creates an arbitrage opportunity for spot traders. Is this a false belief?
6. Do you guys have your own way of differentiating real and fake breakouts?
Disclaimer: I personally have not gone out of my way to use inside information and/or try to predict fake breakouts for a long time before I retired. I didn't need the inside info then... don't need it now.
I know some compare the major pairs (GBP, JPY, EUR, AUD, etc. vs USD) to tell if it is real or not. You may not want to share your exact strategy, but could you tell me if you use spot FX like I just mentioned or share what markets/instruments you use?
7. What exact securities do dealers hedge in on an intraday basis? I have seen good correlation between 10Yr. US Notes and USD. I know correlations will not always hold, but they can definitely be a good tool to measure money flows.
8. When you guys hedge positions, do you unwind each legs at different price points? For example, if you're net short at a top, but hedged the position, would you close the hedge and then wait for price to come down before closing out the position?
So another thing I am trying to understand is a good way to gauge price movements as well as momentum. Right now I measure pip movement versus time.
9. Is there a better way to tell momentum is increasing/decreasing? (I know you can see it visually as well with a moving average, but is there a better statistical method?). In your opinion, do you think you need a better method?
(No I don't think so.)
And no, in my opinion I don't need a better method.
10. Dealers are usually engaged in short-term counter trend trading against the flow, rather than chasing price.
Basically when price moves it leaves behind a "liquidity vacuum, gap, black hole, etc". Do you guys focus on these liquidity holes to guage where price wants to go next?
11. When you were/are dealing or trading, what time frame(s) of price charts would you have on your screen?
12. Were you allowed to front run your own customers orders?
I'm not trying to convince anyone. I'm not in the "convincing" business.
- Joined Oct 2007 | Status: Former institutional dogsbody | 1,253 Posts
I'm not trying to convince anyone. I'm not in the "convincing" business.
- Joined Mar 2012 | Status: Servant of wealth | 1,193 Posts
The more apt and useful question would be 'is anyone here an ex central bank banker'. Then it would really make our day......
GS.
GS.
- Joined Oct 2007 | Status: Former institutional dogsbody | 1,253 Posts
The more apt and useful question would be 'is anyone here an ex central bank banker'. Then it would really make our day......
I'm not trying to convince anyone. I'm not in the "convincing" business.
- Joined Oct 2007 | Status: Former institutional dogsbody | 1,253 Posts
I'm not trying to convince anyone. I'm not in the "convincing" business.
- Joined Oct 2007 | Status: Former institutional dogsbody | 1,253 Posts
I have a small question. Do Inst. coordinate their trades with other inst. traders in different banks? I am not suggesting you are doing it or if you know traders that are doing. Just your opinion on this. To give you a real example, one of the times the Fed announced the QE (not sure which one) there heavy declines in Silver. I hope I remember correctly when I said it was the QE, could have been some announcement from Bernanke. There has been an anonymous accusation of Goldman Sachs coordinating the short trades on Silver with 5 banks. I know these...
My own input: there are other forms of "coordination" that were not covered by recent regulatory investigations e.g. stop hunts, but I imagine even these are being internally curtailed these days at most active trading Banks.
I'm not trying to convince anyone. I'm not in the "convincing" business.