[donaldkagan]

I am curious as to whether any members of this forum have used pair trading methodology in the futures market. I have used statistical arbitrage to great success with equities, and my limited backtesting seems to suggest that futures offer an attractive opportunity.

Thanks for your time,

D.K.

[waveslider]

are you talking about spreading between contract months?
or between two different markets?

[donaldkagan]

Between different markets. Gold and platinum for instance. Anything that has clear historical correlation and exhibits mean reversion.

[Kiwi]

I've thought about this donald but wouldn't you want to make sure that there was causation as well as correlation. Otherwise you risk a sophisticated curve fit.

I suppose you could also look cutouts for situations where a trend develops and reversion fails.

[donaldkagan]

Certainly when pair trading it is critical to make sure that the instruments are linked in some way beyond mere price action. A pair that I have traded very profitably for a long time is
PBR / PBR.A. It's quite clear why these two stocks would show correlation overtime.
After I create a basket of stocks from similar industries I further filter for obvious fundamental issues, mergers etc, I then use a combination of correlation and covariance to finalize the selection.
I'm not sure why the same process wouldn't work with futures. I need to think about how contract expiration would impact the overall system.

[UrmaBlume]

Welcome Donald.

There is indeed considerable statistical arb pair trading in the futures markets.

Our bread and butter is tracking such trade. Nice to see some real quant talk for a change. By far the vast majority of members/posters here are unable to correctly and precisely define the statistical arbitrage in an alpha neutral strategy that uses mean reversion to trade equity pairs. For sure a very select few can - but not many.

We do considerable work tracking traders who operate alpha neutral mean reversion methodologies in the statistical arb of pair trading in equity index futures.

At the micro level where the amplitudes of departure from the mean of the pair price more resembles a hum than a spike you can easily spot the commercial, auto-executed, mean reversion trades by viewing indicators of the intensity of commercial trade.

The chart below shows such spikes. You can see that there were out of sequence spikes in all 3 major US equity futures at precisely the same time. That indicator is further discussed here

[FulcrumTrader]

Running my "accordion" trade entry and management method, I have worked a few ES LONG and DAX SHORT trades the past few days at various times.....there has been some good set ups in the past few days with the decreased volatility.

There was two good trades today in the ES I had entered with collapsing time between trades and well above rolling ten day average order flow rates (while tracking commercials order flow activities).

[donaldkagan]

Thanks for the welcome Urma, I tend to agree with you regarding the paucity of traders who have a solid grasp of stat arb. I have had many a frustrating conversation with professional traders who like to ask "why don't you just trade one side of the pair?"

I found your chart to be very interesting, although I'm sure it's a gross simplification and perhaps fundamentally wrong, that indicator seems as though it's a highly granular realtime record of open interest.

Have you had any experience with a macro arbitrage strategy with futures? Are there any instrument specific challenges that wouldn't be found in equities?