Speaker : Emilio Barucci Title : Trading and optimal execution in futures and spot markets with cross impacts Abstract : We study the inventory management of a trader operating in spot and futures markets when the futures basis vanishes at maturity and exhibits mean-reversion. The model distinguishes between the primary market, where new information is incorporated into prices, from the secondary market whose price contains a mean reverting basis component. We characterize the optimal trading strategy under both cash settlement and physical delivery. We show that access to the secondary market creates a statistical-arbitrage opportunity starting from zero initial wealth by allowing the trader to exploit the intertemporal mean reversion of the basis. Trading mostly occurs in the secondary market. If the spot market is the primary one, then, under physical delivery, the futures contract creates an incentive to hedge the inventory in the underlying asset; whereas under cash settlement the strategy is primarily driven by basis trading in the secondary market with no hedging. If the futures market is the primary one, then hedging occurs in that market for a physical delivery contract. There is no evidence of market manipulation (buy-low/sell-high) across the two markets. In the optimal-execution problem, access to futures markets increases the trader’s expected payoff relative to the classical spot-only benchmark and alters the optimal liquidation dynamics, the liquidation of the position proceeds at a lower rate in case of a cash-settled futures contract. The possibility to rollover the futures position by extending its maturity is investigated. An application to the gold futures market is provided. It is a joint work with Yuheng Lan and Leandro Sanchez-Betancourt.

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