Stephen Aikin - STIR Futures: Trading Euribor and Eurodollar futures

Part 4 covers trading considerations and provides insights into the marketplace and its population, characteristics and the trading decision-making process.

The Appendices supply extra detail, including contact information, for those interested in taking matters further.

A website supporting this book can be found at www.stirfutures.co.uk.

Most people are only aware of interest rate changes when they make the newspaper or television headlines, but interest rates are moving all the time. They are driven by the supply and demand of money being borrowed and lent in the money markets. STIR futures are one of the key financial derivatives in this market.

STIR futures first appeared in the 1980s as the Eurodollar contract, based on US interest rate deposits traded on the Chicago Mercantile Exchange (CME). CMEs success encouraged European emulation, resulting in the formation of the London International Financial Futures Exchange (now NYSE Liffe but referred to as Liffe in the text) in the early eighties and the creation of the Short Sterling (UK rates), Euromark (German rates), Euroswiss (Swiss rates) and Eurolira (Italian rates) STIR futures.

All futures were then traded by a method called open outcry. This involved the shouting out of order flow into a circular pit populated by traders wearing the colourful jackets of their companys livery. Nowadays, almost all trading is computerised, creating a global virtual trading pit with no restriction on the number of participants it can hold. Consequently, STIR futures volumes have exploded in recent years. Arguably they are now the largest financial market in the world. It is not unusual for the leading STIR futures contracts, the Eurodollar and Euribor, to each trade over two trillion dollars or euros worth of interest rate transactions every day. Compare that with the $150 billion traded on a good day at the New York Stock Exchange, or even with the entire foreign exchange market, which trades approximately $3-trillion-worth per day, and it gives a clear idea of just how large the STIR futures markets are.

However, STIR futures are unique amongst financial markets in that individual traders can compete and trade on equal terms with other participants such as banks and large funds. It is a completely level playing field unlike other markets, remaining free from domination by middlemen and market makers. Todays fully computerised STIR futures markets support a global network of professional individual traders who benefit from the unique characteristics of these markets. Traders are not restricted to using a brokers service or trading platform but can directly buy and sell into the central marketplace with similar technology and market information as the largest players.