London Stock Exchange Derivatives Market Strategies in SOLA

Transcription

1 London Stock Exchange Derivatives Market Strategies in SOLA This document is an overview only. Interested parties should consult the Trading Services Description for additional information regarding trading services and risk controls. London Stock Exchange plc has made reasonable efforts to ensure that this overview is correct at the time of writing, but does not guarantee its accuracy, timeliness, completeness, performance or fitness for a particular purpose, and shall not be liable for any errors, omissions, or inaccurate information in this overview, or any decisions made in reliance on it. March 2015 Version 1.0 [] London Stock Exchange Group plc, 10 Paternoster Square, London EC4M 7LS. 1

2 Strategies in SOLA This document summarises the strategy functionality on the London Stock Exchange Derivatives Market (LSEDM) trading platform (SOLA) including a description of the functionality offered, automatically generated strategy instruments on the platform and how to set-up pre-configured strategies on a front-end solution, using the example of the LSEG front-end BTS. 1.0 Introduction London Stock Exchange Derivatives Market (LSEDM) trading platform (SOLA) facilitates trading in derivatives strategies, in line with the trading needs of LSEDM Members. The functionality is highly customisable, allowing market participants to create their own strategy instruments with up to 4 legs and list them for trading by the rest of the market. The trading platform also generates set of automatic strategy instruments, and offers front-end developers the ability to build a set of pre-configured strategies for ease of execution. LSEG s front-end solution, BTS, allows users to use its Strategy Wizard to execute through more than 20 pre-configured strategy combinations. 2.0 Description of functionality Strategies can have a maximum of four legs. Each leg of the strategy must: (a) contain instruments with the same contract size, and (b) have legs that appear in natural number ratios, i.e. as multiples of the smallest leg size in increasing order 1. Market participants will need to enter the price of the entire strategy, i.e. the sum of the price of each leg. Once a strategy instrument is created by a market participant, it will be listed and available to trade by the rest of the market. 2.1 Types of execution: Strategy instruments can be executed on all LSEDM futures and options through the Order book. Strategies on the Order book can be executed by both Strategy v.s. Strategy and Strategy v.s Legs functionality, to maximise the potential for execution. When using the Strategy v.s. Legs (or implied trade ) functionality, the order will execute only when each leg of the strategy is filled (by orders in the Order book with standard price-time priority) with a corresponding bid or ask order on the other side, ensuring simultaneity of execution. SOLA automatically validates the price and quantity of each leg of the strategy before allowing for execution, to ensure that market participants obtain the best results for their trades. Strategies interact with the LSEDM s circuit breakers, bulk quoting protections, and contribute to price and quantity updates to the Market Data Feed (HSVF). 2.2 Automatically generated strategies: LSEDM is currently configured to automatically list Calendar s or Roll strategy instruments for Order book traded Index Futures 2. Typically, LSEDM will automatically generate a roll instrument between the expiring series and the following expiry month which are available for trading on the Order book. 2.3 Bundled Orders: As an alternative to strategies, market participants on LSEDM can use Bundled Orders to execute Block trades in up to four legs. Each leg of the Bundled Order can contain futures and options based on the same or different underlyings, and with the same or different counterparty. Each leg of the Bundled Order can be priced separately. 1 If market participants wish to enter a strategy with derivatives based on different underlyings/ contract sizes, they may use the Bundled Order functionality on LSEDM to be more relevant. Please refer to the LSEDM Trading Services Description for further details 2 Depending on demand, LSEDM may consider listing other strategy instruments for automatic generation. Please contact [email protected] to discuss with a client representative. 2

3 This feature provides the ability for traders to create a trade involving both options and the underlying (future), and may be useful for volatility trades. For further information on Bundled Orders, please refer to the LSEDM Document Library. 3.0 FOR DEVELOPERS: Setting up pre-configured strategies on front end solutions LSEDM s SOLA API allows developers to build front end solutions with pre-configured strategies. Developers need to make use of the FLEXCO creation/ New Strategy Instrument message to send the details of their strategy to SOLA. For further details, please see the LSEDM Technical Documentation (SAIL Specification and FIX Specification.) For example, BTS allows market participants to select one of several pre-configured 2, 3 and 4-legged strategies, through its Strategy Wizard. Traders will only need to enter the total price and size of the strategy, and relevant strikes for each leg of the strategy trade. The strategy will then be listed to enable trading on the instrument. BTS also allows users to build their own customised strategies through FLEXCO creation field. 3.1 Using the Strategy Wizard on BTS: Market participants can open the Strategy Wizard by right clicking any instrument on the order book. The Wizard then offers the ability to easily choose through drop down boxes the underlying, strategy type and specify the relevant strikes, size of each leg and price. The Wizard also provides a snapshot of the order book for each instrument leg, showing the best bid/ask and the associated sizes. Market participants can use the Strategy Wizard to execute a strategy either as an order or as a block trade (with the relevant price and tick size). For example, for a SBER Feb 2015 Call Butterfly on the Order book, the Strategy Wizard will appear as above. Once the details are filled, Pay will allow the market participant to pay the specified price for trading one lot of the created strategy; Cash will allow the market participant to get at least the specified price for trading one lot of the created strategy. 3.2 LSEDM suggested convention for pre-defined strategies: To assist front end developers in building a set of pre-defined strategies, LSEDM suggests the following convention (useful for developing front end systems). Please note, this is a simply an illustration of how to build a pre-defined list. Market participants can choose their own convention, using the FLEXCO message. 3

4 Strategy Description (Long position) LSEDM BTS convention (K = strike, T = maturity) 2 legged strategies 1. Calendar (IOB and UK products) 2. Calendar (Oslo products) Buy the near month future and sell the far month future Sell the near month future and buy the far month future Buy F (T 1) Sell F (T 2), T 1 < T 2 Sell F (T 1) Buy F(T 2), T 1 < T 2 3. Call Calendar Buy the near month call and sell the far month call Buy C (K, T 1) Sell C (K, T 2), T 1 < T 2 4. Put Calendar Buy the near month put and sell the far month put Buy P (K, T 1) Sell P (K, T 2), T 1 < T 2 5. Diagonal Call Calendar 6. Diagonal Put Calendar Buy the near month call and sell the far month call at different strike prices Buy the near month put and sell the far month put at different strike prices 7. Straddle Buy a call and a put at the same strike (and at the same expiry date) 8. Collar Buy a put at the lower strike and sell a call with a 9. Risk Reversal Sell a put and buy a call at the same strike (and at the same expiry date) 10. Call Buy call at lower strike price and sell call at higher strike price (and at the same expiry date) 11. Put Buy put at higher strike price and sell put at lower strike price (and at the same expiry date) 12. Ratio Call Buy a call at lower strike price and sell 2 calls at a 13. Ratio Put Sell a put at lower strike price and Buy 2 puts at a 3 legged strategies 14. Straddle versus Short Call 15. Straddle versus Short Put Buy a call and a put at the same strike (and at the same expiry date), sell a call at higher strike Buy a call and a put at the same strike (and at the same expiry date), sell a put at a lower strike 16. Call Butterfly Sell two calls at a middle strike, buy two calls each at lower and higher strike (all with same expiry date and with strikes equidistant) 17. Put Butterfly Sell two puts at a middle strike, buy two puts each at lower and higher strike (all with same expiry date and with strikes equidistant) 18. Call Ladder Buy call, sell call at higher strike and sell call at equally higher strike (all with same expiry date and with strikes equidistant) 19. Put Ladder Sell put, sell put at higher strike and buy put at equally higher strike (all with same expiry date and with strikes equidistant) 20. Call spread versus Short Put Buy C (K 1, T 1) Sell C (K 2, T 2), T 1 < T 2 Buy P (K 1, T 1) Sell P (K 2, T 2), T 1 < T 2 Buy C (K, T) Buy P (K, T) Sell P (K, T) Buy C (K, T) Sell 2 x C (K 2, T), K 1 < K 2 Sell 2 x P (K 1, T) Buy C (K 2, T) Buy C (K 3, T) Sell 2 x C (K 2, T), K 1 < K 2 < K 3 Buy P (K 3, T) Sell 2 P (K 2, T), K 1 < K 2 < K 3 Sell C (K 2, T) Sell C (K 3, T), K 1 < K 2 < K 3 Sell P (K 2, T) Buy P (K 3, T), K 1 < K 2 < K 3 Buy Call, sell Call at higher exercise price, sell Put Buy C (K 2, T) 4

5 Strategy Description (Long position) LSEDM BTS convention (K = strike, T = maturity) at any (lowest) strike Sell C (K 3, T), K 1 < K 2 < K Put spread versus Short Call 4 legged strategies 22. Straddle Calendar Buy Put and sell Put at lower strike, sell Call at any (highest) strike Selling a near term straddle while buying a longer term straddle at same strike prices 23. Iron Butterfly Buy a put and a call at a middle strike, sell a put at a lower strike and a call at a higher strike (all with same expiry date and with strikes equidistant) 24. Call Condor Sell two calls at middle equidistant strikes, buy two calls each at lower and higher strike (all with same expiry date and with strikes equidistant) 25. Put Condor Sell two puts at middle equidistant strikes, buy two puts each at lower and higher strike (all with same expiry date and with strikes equidistant) 26. Box Buy call and sell put at same strike, buy put and sell call at higher strike (all with same expiry date) 27. Diagonal Straddle Calendar Sell near term straddle and buy long term straddle at different strike prices. 28. Iron Condor Buy Put 1, Sell Put 2, Sell Call 1 and Buy Call 2 all in ascending order of strike price, all at the same maturity Buy P (K 2, T) Sell C (K 3, T), K 1 < K 2 < K 3 Sell C (T 1, K) Sell P (T 1, K) Buy C (T 2, K) Buy P (T 2, K), T 1 < T 2 Sell P (T, K 1) Buy P (T, K 2) Buy C (T, K 2) Sell C (T, K 3), K 1 < K 2 < K 3 Buy C (T, K 1) Sell C (T, K 2) Sell C (T, K 3) Buy C (T, K 4), K 1 < K 2 < K 3 < K 4 Buy P( T, K 1) Sell P (T, K 2) Sell P (T, K 3) Buy P (T, K 4), K 1 < K 2 < K 3 < K 4 Buy C (T, K 1) Sell P (T, K 1) Sell C (T, K 2) Buy P (T, K 2), K 1 < K 2 Sell C (T 1, K 1) Sell P (T 1, K 1) Buy C (T 2, K 2) Buy P (T 2, K 2), T 1 < T 2 Sell P (K 2, T) Sell C (K 3, T) Buy C (K 4, T), K 1 < K 2< K 3 < K For further information contact: For technical enquiries: LSE Derivatives Technical Account Management T: +44 (0) E: [email protected] For further information on this document: LSE Derivatives Market T: +44 (0) E: [email protected] 5