FTSE 100 index vs FTSE 100 futures. Index Arbitrage?

[SuperDriveGuy]

Hi All,

Does anyone have any views or has tried index arbitrage? Maybe not purely in terms of arbitrage but as an additional factor to gauge the direction of the index or its equivalent future. I refer to FTSE100 here, but the same applies to DAX too(guess its easier to calculate as it has 30 constituents)

Would it be simple to calculate the index value(I guess I should add, I have access to the formula etc but is it practical to keep this updated with the changes, dividends,share splits etc in realtime) OR are there feeds out there that give the same information realtime(or near realtime)?

Any pitfalls I should be aware before going down this route?

Any feedback is much appreciated.

Thanks,

 

[superfrank]

Hi All,

Does anyone have any views or has tried index arbitrage? Maybe not purely in terms of arbitrage but as an additional factor to gauge the direction of the index or its equivalent future. I refer to FTSE100 here, but the same applies to DAX too(guess its easier to calculate as it has 30 constituents)

Would it be simple to calculate the index value(I guess I should add, I have access to the formula etc but is it practical to keep this updated with the changes, dividends,share splits etc in realtime) OR are there feeds out there that give the same information realtime(or near realtime)?

Any pitfalls I should be aware before going down this route?

Any feedback is much appreciated.

Thanks,

Sounds like an interesting edge. I agree that it makes more sense to do it for the DAX. Please post more if you find a way to get the formula realtime. Hitting any overreactions, taking into account other indcators, might prove a profitable angle.

 

[market-operator]

SuperDriveGuy: It's certainly possible to do what you are describing (i.e. calculating the index value in real time and attempting to arbitrage any differences between cash and the future). Perhaps, a more prudent question would be to ask yourself, whether the activity you describe, is a useful allocation of your resources (capital and time).

If your reason for doing this is an academic one (e.g. to test the EMH or your programming skills, then arguably, such an endeavour has some merit). On the other hand, if you are intending to base a trading strategy around cash/future differentials. Well .... lets start by looking at the market participants who make these kind of "plays".

Almost without exception, they are funds with access to relatively large capital pools - additionally, they have access to market information that most private traders are not even aware exists.

To successfully make money by index arbitrage you need:

1. Access to large pools of capital (since most deviations between spot and the future are minuscule [when they appear] ), so you need large positions to make the trade "worthwhile"
2. Direct Access trading tools with millisecond (or less) fills - because that is how long any anomalies that appear, tend to last.
3. Extremely low (or waived) commission fees (otherwise, your profit disappears up in a "puff")
4. Market information going over and above Level II data (I'm hinting at "front running" here)

This is by no means an exhaustive list, but hopefully, it give you an idea of what/who you will be contending with. Using the information above, I am sure you can decide whether it is worth your while going down this route.

 

[Mornington Crescent]

your chances of success are virtually zero
your chances of failure are virtually 100%

the Fair value of futures versus a futures quote is already an overpopulated sophisticated market place

it is not a place for amateurs

the first thing you need to be able to assess is Fair Value

Have you done that yet ?

 

[captaincol]

FTSE publishes tick by tick FTSE100 and a few other indices now, so the arb possibilities for someone as retail investor are now zero. If it were 15 second pulses, there would be more of an opportunity, but still you would need to be running massive GPU's, and be very close to the exchange with a great great DMA access and a decent pool of cash. I think there is always room for someone to jump in with ther big guns, but you need to have a decent set of resources, which really puts the risk very high. With risk so high it is probably worth looking at other options for trading.

 

[Pento]

As other people have said, this trading arbitrage is not for you or any other retail trader.

The banks and large funds have been doing this for years and are now so advanced at it there is no point in you trying to start off in this strategy. It will all be algos now anyway, so you won't be able to compete.

Sorry to say you'd be better off punting the dogs.

Where you may be able to compete is by trading it with a longer time view say over a week or month by deciding how far the future should be trading from the cash in tick/percentage terms. But even this is fairly difficult without the manpower behind you that the fund trader would have.