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Published in Automated Trader Magazine Issue 21 Q2 2011

We’ve written about plenty of equity and FX algorithms, and featured fixed income and derivatives trading venues, but haven't yet featured an algorithm designed for the complex world of interest rates and their derivatives, so we thought it was time that changed - here's a fascinating look at the use of an agency algorithm to take a long position in CME Eurodollar futures.

Another first in this issue's Automated Trader. While we've written about plenty of equity and FX algorithms, we've never featured one for the complex world of interest rates. Robert Almgren, President and Christian Hauff, CEO of Quantitative Brokers change all that by illustrating the use of an agency algorithm to take a long position in CME Eurodollar futures.

Robert Almgren & Christian Hauff

The Scenario: It is March 2nd 2011 and CME March 2012 Eurodollar futures have been rallying steadily since mid February. A US fund manager is anticipating that this rally is likely to persist over the coming weeks, but is looking for a pullback buying opportunity. The US ISM Non-Manufacturing Composite and Initial Jobless Claims are due for release the following day and both have been trending positively in recent months. Related indicators have also been relatively resilient; payroll company Automatic Data Processing has just reported that the US private sector added 217,000 jobs in February, considerably ahead of the 180,000 predicted by many analysts.

Against this backdrop, the manager takes the view that if the ISM and initial jobless stats are positive yet again then stocks are likely to rally and the Eurodollar to sell off, thereby providing a suitable opening to take a long position. He therefore instructs his trading desk to buy 1090 lots of the March 2012 Eurodollar on March 3rd.

Figure 1: Event Significance

Figure 1: Event Significance

The Asset: CME March 2012 Eurodollar futures

The Challenge: To buy 1090 GEH2 Eurodollar futures contracts at an average price of 9903.30 or better.......

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