arbitrage over different markets

[seancranky]

I have a question about arbitrage.

Let's say the company bought 1000 some stocks in NASDAQ, then they sold these stocks in Frankfort exchange market because of a difference of prices. That's what textbook say, without further details. How does it work? Is it possible to actually sell the stocks in another market, or what really happens is they short the stocks in Frankfort? That's very different.

It's so annoying all the information from books or internet just wave hands and say: hey, basically it's like this. Can someone help me?

Cheers

 

[dealer911]

I have a question about arbitrage.

Let's say the company bought 1000 some stocks in NASDAQ, then they sold these stocks in Frankfort exchange market because of a difference of prices. That's what textbook say, without further details. How does it work? Is it possible to actually sell the stocks in another market, or what really happens is they short the stocks in Frankfort? That's very different.

It's so annoying all the information from books or internet just wave hands and say: hey, basically it's like this. Can someone help me?

Cheers

Some stocks are listed on more than one exchange.. If the shares are listed on more than one exchange you have to check that these shares are also fungible and dont for example pay dividends on different days.. you would need to ask your broker really.. the prices are normally fairly in line with each other and there are computer systems that can and do arbitrage them quicker than you or I.. also if the shares are listed on more than 1 exchange they may be priced in $ on 1 exchange and Eur on another so you would have to do a currency trade at the same time .. it is a very appealing strategy but a bit more complex than it sounds because you also have to take into account commissions and taxes that an investment bank do not have to pay.

 

[seancranky]

I know, I wouldn't do arbitrage with my bare hands. Just some theoretical research.

Technically, it's very interesting. suppose,
ING Groep, amsterdam: 6.50-6.52 milan: 6.45-6.53. In this case, they have different spreads, you can definitely arbitrage milan and use amsterdam to hedge, and make money of the difference of the spreads.

But in another case, let's say,
Google Inc, Frankfort: 532.00-533.00, London: 534.00-535.00
Unless you can buy in Frankfort and sell in London, otherwise you cannot arbitrage. Surely you can long Frankfort and short London, because they will eventually meet and you make money, but that's not what I concerned.

Well, based on what you said, can I understand: if a stock is listed on multiple exchanges, then it is possible to actually buy this stock here and sell it there?

 

[qwerty07]

computers have long long taken over this kind of arbitrage, mainly because it's as basic as it gets. assuming the quotes you provided were correct: the ING example only goes to show the stock is more heavily traded in amsterdam, so it has a smaller spread. not sure what kind of opportunity you see here, except making a limit offer in milan that most likely will never be filled.

the second example, incl. commissions, stamp tax, etc you will lose big time.

 

[seancranky]

Thank you for replying.

I am doing a little research on automated arbitrage for getting a job, so, basically I am talking about institutional arbitrage (with computer).

The first case, the arbitrage strategy is:
1, send limit order to buy ING shares in Milian at good price, suppose the limit is 6.46, and you succeed.

2, immediately short ING shares in Amsterdam at bid price for hedge.

3, send limit order to sell ING share in Millan at good price, let's say ask price-0.01, wait until it's done.

4, immediately buy ING shares in Amsterdam at ask price to neutralize your position.

This is completed in 1 second, by computer of course. And you make a few cents, say, 5 cents per share.

 

[dealer911]

Thank you for replying.

I am doing a little research on automated arbitrage for getting a job, so, basically I am talking about institutional arbitrage (with computer).

The first case, the arbitrage strategy is:
1, send limit order to buy ING shares in Milian at good price, suppose the limit is 6.46, and you succeed.

2, immediately short ING shares in Amsterdam at bid price for hedge.

3, send limit order to sell ING share in Millan at good price, let's say ask price-0.01, wait until it's done.

4, immediately buy ING shares in Amsterdam at ask price to neutralize your position.

This is completed in 1 second, by computer of course. And you make a few cents, say, 5 cents per share.

This is already being done.. also be aware that there are many institutional algorithims that will trade accross multiple venues simultaneously..so if you lost your ING off the offer in milan you will likely find the shares in amsterdam would have already moved as well ..I really dont think this is worth your while and I fear this wont help you get the job you are after.. there really is nothing left on the table anymore and you might look foolish pushing this as a strategy.. good luck though.

 

[seancranky]

I know, I know. Everybody looks stupid when they are new in a career, that's why I need you guys who are already in this career to point out my mistakes and I can learn, that's how people move forward, otherwise I am stupid forever.

What so ever, I do noticed that the spreads in Milan is almost always wider than London, Paris, Frankfurt, Amsterdam. What can be done about this? Does anyone have any ideas?

 

[dealer911]

I know, I know. Everybody looks stupid when they are new in a career, that's why I need you guys who are already in this career to point out my mistakes and I can learn, that's how people move forward, otherwise I am stupid forever.

What so ever, I do noticed that the spreads in Milan is almost always wider than London, Paris, Frankfurt, Amsterdam. What can be done about this? Does anyone have any ideas?

No I didnt mean it was a stupid point at all.. it is a very good observation and it does look a compelling trade.. look at the "last" traded price on both exchanges and check the time and sales if you can and you will see some problems.... Arbitrage is the best type of trading so keep looking for those kinds of opportunities..you will need very low execution costs and super fast algo's to compete though.

 

[qwerty07]

I know, I know. Everybody looks stupid when they are new in a career, that's why I need you guys who are already in this career to point out my mistakes and I can learn, that's how people move forward, otherwise I am stupid forever.

What so ever, I do noticed that the spreads in Milan is almost always wider than London, Paris, Frankfurt, Amsterdam. What can be done about this? Does anyone have any ideas?

spreads tend to get wider if there's isn't a lot of trading volume. ING is one of the busiest tradeds stock in Amsterdam, In Milan you're lucky to have 10 transactions an hour.

 

[daminescu]

spreads tend to get wider if there's isn't a lot of trading volume. ING is one of the busiest tradeds stock in Amsterdam, In Milan you're lucky to have 10 transactions an hour.

Hi there,
The opportunity exists in other markets at much wider spreads. I am aware of at least one market pair on which the DJ Mar futures is traded at different spread. The reason it makes sense to do this in futures rather than stocks is because most of the new futures have the liquidity of exiting the position assured - there is a cash settlement at the settlement date, so you don't have to worry about how you get back to cash.

For those interested, take a look at www.sibex.com at the DEDJIA_RON Mar 10 product and then at http://www.cmegroup.com/trading/equity-index/us-index/e-mini-dow.html. You can arbitrage as follows: say you offer at sibex at current market offer less a nominal value (just below current best offer). If lifted, you cover yourself on the Chicago market (at a lower offer). So you have to figure out how much of the Chicago product you have to buy to have a perfect hedge. This depends on 2 things: the contract size in each market and the currency exchange rate of the RON to USD. In this case, the contract size of the DEDJIA_RON is 1 RON and that of the Chicago E-mini is 5 USD. Assuming for simplicity that 1USD=1RON, for every 5 DEDJIA contracts I sold on sibex, I need to buy 1 E-mini. If the exchange rate were 1USD = 2 RON, then for every 10 DEDJIA contracts I'd need to buy 1 e-mini. (Alternatively, for every 1 DEDJIA sold, I need to buy 0.1 E-minis). All is well so far.

The problem occurs in two ways. First, the exchange rate is not an integer. Thus, it follows that the equivalence is something like this: For every 1 DEDJIA contract sold, I need to buy 0.13504567 Eminis. Problem is, I can't trade such small fractions of a contract. I think the smallest fraction is 0.1 Now, let's assume that this is really not a big deal if you trade volume, because you can always round up or down to the nearest tradable fraction of an Emini.

The second problem ad the biggest is that from trade date to settlement date there could be as much as 3 months, time in which the RON/USD rate changes. Here's the bonus question: how do you hedge this currency risk? If anyone can help, I would truly appreciate and if you have a solution that works, I'll help you set up accounts to trade on it. BTW, you do have to hold it to settlement,otherwise you'll have to exit each contract in it's own market, and thus you'll eat the bid-ask arbitrage that you just made.

Regards

 

[seancranky]

Hi there,
The opportunity exists in other markets at much wider spreads. I am aware of at least one market pair on which the DJ Mar futures is traded at different spread. The reason it makes sense to do this in futures rather than stocks is because most of the new futures have the liquidity of exiting the position assured - there is a cash settlement at the settlement date, so you don't have to worry about how you get back to cash.

For those interested, take a look at www.sibex.com at the DEDJIA_RON Mar 10 product and then at http://www.cmegroup.com/trading/equity-index/us-index/e-mini-dow.html. You can arbitrage as follows: say you offer at sibex at current market offer less a nominal value (just below current best offer). If lifted, you cover yourself on the Chicago market (at a lower offer). So you have to figure out how much of the Chicago product you have to buy to have a perfect hedge. This depends on 2 things: the contract size in each market and the currency exchange rate of the RON to USD. In this case, the contract size of the DEDJIA_RON is 1 RON and that of the Chicago E-mini is 5 USD. Assuming for simplicity that 1USD=1RON, for every 5 DEDJIA contracts I sold on sibex, I need to buy 1 E-mini. If the exchange rate were 1USD = 2 RON, then for every 10 DEDJIA contracts I'd need to buy 1 e-mini. (Alternatively, for every 1 DEDJIA sold, I need to buy 0.1 E-minis). All is well so far.

The problem occurs in two ways. First, the exchange rate is not an integer. Thus, it follows that the equivalence is something like this: For every 1 DEDJIA contract sold, I need to buy 0.13504567 Eminis. Problem is, I can't trade such small fractions of a contract. I think the smallest fraction is 0.1 Now, let's assume that this is really not a big deal if you trade volume, because you can always round up or down to the nearest tradable fraction of an Emini.

The second problem ad the biggest is that from trade date to settlement date there could be as much as 3 months, time in which the RON/USD rate changes. Here's the bonus question: how do you hedge this currency risk? If anyone can help, I would truly appreciate and if you have a solution that works, I'll help you set up accounts to trade on it. BTW, you do have to hold it to settlement,otherwise you'll have to exit each contract in it's own market, and thus you'll eat the bid-ask arbitrage that you just made.

Regards

currency swaps?

 

[seancranky]

or a currency exchange future, but it costs extra money though

 

[seancranky]

Well, actually it's a very interesting problem. Try to find another pair where one is in US another one is in (where RON is used...sorry my knowledge doesn't suffice) that you can arbitrage the dollar one and cover with the RON one. Then you don't need to exchange currency at all, and the profit is locked.

What do you think?

 

[daminescu]

yes, futures. Let's assume I can trade RON/USD futures, but for some reason I still can't figure out what I would have to do. It may be a dumb question, but I can't figure out the mechanics. Let's take the easiest example where the RON/USD Mar 10 expiry contract trades at 1. In other words, the market expects that at settlement of Mar 19, 2010 (same as the settlement for my DJ futures contract), 1 USD will be worth 1 RON. Since this is the level I can trade at, this is what I will use in calculating my equivalence. But now, do I have to sell or buy a futures contract at that level? and if so, how much of it do I have to buy to hedge my currency risk? I just don't know how to figure that out.