Closing Auctions

The official cutoff time for submitting MarketOnClose (MOC) and LimitOnClose (LOC) orders to the NASDAQ closing auction is 3:50pm ET. For the NYSE and NYSE Amex closing auctions, the official cutoff time is 3:45pm ET. For the NYSE Arca closing auction, the official cutoff time is 3:59pm ET. With the exception of orders that are submitted to offset published imbalances, all MOC and LOC orders must be submitted before each market center’s official cutoff time.

Total Return Swaps

A TRS is a financial contract which transfers both the credit risk and market risk of an underlying asset. (It can be categorized as a type of credit derivative).

The protection seller (i.e. the investor) pays the fixed rate (i.e. LIBOR + 40 bps) to receive the return (& risk) of the underlying asset.

The protection buyer (i.e. the broker/dealer) receives the fixed rate & pays the return of the underlying asset (as well as transfers the risk of the underlying asset) to the seller.

Essentially, the protection buyer has "bought protection" by swapping the risky underlying for a fixed rate.

An advantage of a TRS is that one party (i.e. the seller) can derive the economic benefit of owning an asset without actually carrying the asset on its balance sheet while the other party, who does carry the asset on its balance sheet, is protected from loss in the asset's value.

(It is not unlike the scenario where the dealer gives the investor a loan to purchase assets, that are held with the dealer as collateral.)

Hedge funds may use TRS's to obtain leverage on the reference assets (i.e. they can post a smaller amount of collateral upfront than the size of the reference asset.)

The cost of the derivative is determined by the cost to the dealer (i.e. the buyer) of carrying the underlying position (which is made up of the financing charge for acquiring the underlying index position in the cash market, compensation for counterparty risk, dealer profit, & any adjustment for tax related expenses).

So if the cost to the investor (i.e. the seller) is "LIBOR - 40" bps to get long the return of the S&P 500...

We can view it as... The investor is borrowing money at the cost of LIBOR to buy underlying stocks. However, the actual cost is 40 bps less. This "made" 40 bps can be considered "out-performance" offered by the broker/dealer. Perhaps the broker/dealer is able to offer this out-performance due to its actual way of implementing the return (i.e. futures that roll cheap, lending stock inventory, etc.)

Alpha Transport/Portable Alpha

"Portable alpha" refers to separating the active manager’s excess return from the base market return and transporting the alpha to some other market index.

For example, to accomplish this using futures, the investor allocates a pool of capital across three strategies: The majority of the assets are invested with the active manager, a small portion is used to purchase the "other market" index futures, and index futures are sold to eliminate the market return (beta) from the active manager’s total return. The investor is then left with the active manager’s alpha plus passive exposure to the "other market" returns.

Another example for an active bond investment...

Invest in an actively managed fixed income portfolio & keep the exposure to both the fixed income beta and the manager’s alpha. Then use the fixed income portfolio as collateral for a portfolio of futures or swaps that provide equity exposure.

Note that the beta exposure, say through a third-party overlay manager buying futures or executing swaps, may require only a small portion of cash/collateral (for margin). This may allow for a greater portion of the funds to be committed to generating alpha.

Quadruple Witching

A day on which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire.

(Single stock futures are not at all a significant source of volume)


(Stock index futures and index future options expire on the open)
(Stock options and single stock futures expire on the close)

(Index options are cash settled.)
(ETFs and single stock options are physical)

Overnight Indexed Swap (OIS)

An Overnight Indexed Swap (OIS) (an interest-rate derivative) is a fixed/floating interest rate swap with the floating leg computed using a published overnight rate index, typically considered less risky than the corresponding interbank rate (LIBOR), in the case of the USD, the Fed Funds Effective Rate.

Two parties agree to exchange at maturity the difference between interest accrued at the fixed rate & interest accrued at the compounded floating rate on the agreed notional amount of the swap.

Net payment is made two business days after maturities

The basis convention is Annual ACT/360 (or Actual/360)

(Interest = Principal x CouponRate x Factor)

(Factor = (Actual days between the start and end dates inclusive)/360) (i.e. Assumes 360 day year)

swap receiver... receives fixed rate payments (and makes floating rate payments)

swap payer... receives floating rate payments (and makes fixed rate payments)

An OIS acts as a perfect hedge for a cash instrument...

Cash can be lent daily (i.e. in a daily accruing interest bearing account) for daily interest receipts. In contrast, the swap receiver effectively makes daily interest payments. If the daily rates 'line up,' the cash inflow can be matched with the cash outflow, the the OIS receiver has hedged the daily rate change uncertainty with a fixed rate.

OIS rates (or, in particular, the difference or 'spread' between OIS rates & LIBOR) are an important measure of risk & liquidity in the money market, considered by many to be a strong indicator for the relative stress in money markets. A higher spread is typically interpreted as an indication of decreased willingness to lend by major banks, while lower spread indicates higher liquidity in the market. The spread can be viewed as indication of banks' perception of the creditworthiness of other financial institutions & general availability of funds for lending purposes