Back to Microstructure: ETF Securities USD and EUR Coffee Offerings

ETF Securities (ETFS) offers a multitude of dual-listed commodity, currency, and index ETFs.  This is a brief study of three of those securities designed to track the DJ-UBS Coffee Sub-Index.  ETFS offers a German-listed, Euro-denominated security under the ticker OD7B; an LSE-listed, US dollar-denominated security under the ticker COFF; and a French-listed, Euro-denominated security under the ticker COFFP.

The cash EUR/USD was used for price discovery and all prices were recorded 5 July 2012.  All times are CST.

The spread between the currency-adjusted OD7B shares versus the COFF shares:

The spread between the currency-adjusted COFFP shares versus the COFF shares:

Note the frequent liquidity-shocks absorbed by each spread uniquely.

ETF / Futures Arbitrage: SLV against CME's Silver (SI)

This is the spread built from trading a block of iShare's Silver Trust (SLV) shares against one CME-listed large Silver (SI) contract.  The December, 2011 silver contract was recorded in this study due to the low bid/ask spread and subsequent liquidity.  The SI contract begins trading on Sunday evening, hours before liquidity is introduced to the SLV shares, visible on the left of Chart A.  The introduction of SLV liquidity allows for the construction of the spread.

September 26 - 27, 2011

Chart A

Chart A.1

September 26, 2011

Chart B

Chart B.1

   

September 26 - Opening Minute

There was a slight break that occurred during the opening minute of SLV, however the deviation appears to have been caused by halted quotes in the SI leg of the trade.  It remains to be seen whether this halt in SI was a error on my end on account of my taq data collection software or if the SI contract actually was halted at the exchange level for several seconds.  Below are the corresponding prices of SLV and SI (left) and the deviation in the spread (right). 

   

Level 1 Volumes & Prices During the Opening Minute

Below are the level 1 bid/ask prices and corresponding volumes for the two securities.  The offered volume on SLV (the red bars) began to increase as the prices of SLV rallied while the SI contract, for whatever reason, remained unchanged.  This appears to be evidence of high-frequency firms placing resting orders on the SLV offer in an attempt to capture this mispricing.  Around 08:30:53, prices in SI revert to 'normalcy' and the spread collapses.

Chart C

Chart D

Similar, although less severe, breaks did occur during both open markets (see Chart E.1), however these will be explored in forthcoming posts.  The volume of quote changes makes this amount of data very difficult and tedious to work through.  Excel becomes very unstable and unresponsive operating at the "zero bound".  If anyone has any recommendations on alleviating this issue, I am all ears.

September 27, 2011

Chart E

Chart E.1

Boeing / Lockheed Pairs Trade, Cont'd

BA released earnings this morning not surprisingly showing strong growth over Q3 2006. EPS beat the Street's estimates of $1.24, coming in at $1.44, a $0.55 gain over Q3 06. Revenue for the quarter grew to $16.52B, a 12% increase over Q3 2006. Showed conservative 2007 guidance of $5.05 - 5.15 EPS, vs. the Street's estimates of $5.06. Lowered 2008 guidance slightly due to previously disclosed delays in delivery.

LMT also posted strong earnings, beating the Q3 07 estimates by $0.16, showing EPS of $1.80 vs. $1.46 for Q3 06. Sales up 16%; Profit up 22%; Boosts 2007 EPS estimates.

In premarket trading, BA is trading $2 up around high $96; LMT relatively unchanged.

As in my original posts on this particular pairs trade (here and here), on 2 Oct BA began what ultimately became roughly a 12% correction, from a high of $106 down to $93/sh. LMT, on the other hand, continued in its trend up until 12 Oct, when it was trading around $111, when it began a steady fall over the next week, falling as low as mid-$103.

My original prediction on the direction of the two appeared to be coming to fruition, as evidenced by the 50-day chart below:



Support began to develop 10 Oct. when the volume increased significantly. Again, the smart money noticed a slight correction in Boeing, a solid, global firm, and saw a value play, so they began buying up. Coupled with the mutual funds, the Arbs began going long BA and shorting LMT, causing a convergence play.

I expect BA to be back in the low $100s by early Nov., while LMT will more than likely stay in a range of $107-111 until BA gains some ground.

FD: I have a position in BA.

Boeing/Lockheed Pairs Trade Part Two

Boeing looks to be on the rebound today as it posted the largest gain since 25 September. As BA began moving into the $93 range this morning, it seemed to be finding a solid level of resistance. An hour after market open, the bulls moved in for the value. Throughout the day, news started coming over that there had been some major restructuring among BA's Overseas Operations and 787 Divisions.

Not surprisingly, as I watched the Market Depth ticker, offers continuously got lifted throughout the day - sometimes in small volume, others in large, as evidenced by two major moves during the afternoon seen below. Within 10 minutes, there was a move from $94.75 up to $95.70, almost a full point. That was surprising enough, considering the relatively flat trading of the prior 3 hours. Again, at 3:15PM, BA got another shock from some major buyers - again, offers were lifted and the market moved from a low of $94.97, to the day's high of $96.27.



Clearly there were some major funds moving in to take advantage of the statistical anomaly caused by the news of production delays. Specifically, as in my original post on this subject, the spread between Boeing and Lockheed is clearly out of proportion relative to the risks associated with problems in management and delays in production.

As evidenced by the resent strength of Boeing and the relative weakness of Lockheed, it seems that the quants and their OMSs have been shorting LMT and going long BA as the spread begins to converge. I expect to see similar activity all the way up to the low $100s, and vice versa for LMT.



Technical Indicators that supports: (i) The 10-day RSI dipped below 25 yesterday, indicating an over-sold status, and (ii) trading closed below the lower Bollinger Band during yesterday's trading, indicating a possible move back to the opposite side near $105 or $110.

FD: I am long the Nov 100 BA Call.

Boeing is simply a better value

The recent headlines regarding Boeing's (BA) problems meeting their delivery deadlines have caused the stock to slide, as of this writing, to the low 95s, losing roughly 12% of its value during the previous two weeks. BA is still a solid company with good management, strong earnings, and good outlook. So, what could come of a 12-15% correction? Put simply, a wealth of opportunity.

Compare Boeing to Lockheed Martin (LMT) and you find two relatively similar, upward slanting, charts.

Many hedge funds utilize Statistical Arbitrage in order to pinpoint statistical abnormalities such as this. The typical play here would be to go long BA while simultaneously going short LMT, expecting the two to converge once again, or at the very least, continue in their trend up, with the gains from going long BA outweighing the losses from going short LMT.

If this analysis is correct, which Friday's trading has led me to believe, BA should begin to level out this week, while LMT moves lower or sideways. Friday saw BA open at 96.11 and close at 96.69, the first substantial increase in 8 days. Today will see a close lower, but in a range smaller than Friday's.

Full disclosure: I am long the BA Nov Call.