A Word About "Arbitrage"...

[misterkel]

Yes I agree with you and Sig
and although what misterkel has sown might be doable how do we know following
- The exchange is acting purely as an exchange and does not have a Prop / market maker arm that gets some sort of preferential treatment like what happened with FXCM USA and they were shot down by CFTC
- The fact that fix can;t offer futures under CFTC regulation
Hence the apprehension
and 1015 agree with Sig's comment below
But I'd advocate that claiming there is no risk, and furthermore claiming that anyone who claims there is risk is doing so from a position of ignorance, isn't terribly helpful in advancing the discussion. Refusing to acknowledge even the possibility of any minuses is more a sign of being caught up in a bit of a cult in my experience.

Okay, this is irritating. I have REPEATEDLY said there is risk. I have NEVER denied it. I have explained it several times. There is some exchange risk, though most of it is perceived rather than real. Legit money will vet that risk, but they are not permitted by contracts and location to trade on unregulated markets.
There is risk of the trade moving heavily against you, forcing posting of additional collateral.

And yes, Bitmex has been seriously accused of market making schemes (and Bitfinex). Both are likely true. Binance, far less likely, and ftx has personally demonstrated to me their integrity, so I have my own reasons for trust on that score.

 

[traderjo]

1. It's important to split the risk and function of the deregulated exchanges. If Kraken and Bitstamp get hacked and you have funds there that are lost, it's a big financial impact to you. If you trade CME futures that use Kraken as one of a basket of places they use only to set the index value and Kraken gets hacked, it has next to no impact or absolutely no financial impact to you. The potential maximum financial impact to you in the first case is huge, the potential maximum financial impact to you in the second case is tiny. So I would disagree with the line of thinking that says because CME uses unregulated exchanges to get reference prices, they're somehow even in the same risk universe as using unregulated exchanges.
2. Sorry, only 21 crypto exchanges hacked, and one crypto itself "hacked" (yes, I understand it was a 51% attack and yes, I could go into a long discussion about exactly what that is, I'm not as ignorant on blockchain as you've assume). Versus zero regulated exchanges. How does that change my point exactly?
3. I never even intimated that CME BTC futures prices influence markets and if it does or not has absolutely nothing to do with my point. I'm really confused why you're bringing this up in response to my post pointing out that unregulated crypto exchanges carry a risk premium because they're demonstrably risky compared to CME?
4. Futures diverge from spot for a number of reasons depending on commodity. My assertion is that they diverge from spot in BTC because there is a very real risk that the platform you have to use in order to take advantage of that arbitrage opportunity is not itself risk free, it is in fact demonstrably very risky. And therefore the divergence in futures prices from spot is not a risk free or even low risk arbitrage opportunity, it is in fact a reflection of the risk that you take on in order to take advantage of that opportunity. I'm certainly open for discussion on what level of risk there is in a given unregulated exchange and if the current premium reflects that risk. Happy to learn from anyone who's willing to discuss that. But I'd advocate that claiming there is no risk, and furthermore claiming that anyone who claims there is risk is doing so from a position of ignorance, isn't terribly helpful in advancing the discussion. Refusing to acknowledge even the possibility of any minuses is more a sign of being caught up in a bit of a cult in my experience.

Sig you have defined this thing in a very good fashion (IMHO) .. LOL CME it gets best of the both worlds..some clever person at CME must have thought how can we avoid the stigma of these thinly regulated exchanges on one hand and on the other get a piece of action!
I hope they do same with FX futures more aggressively too. so the entire Market maker unregulated OTC FX (FXCM USA) gets a kick on the backside
CME uses unregulated exchanges to get reference prices,

 

[traderjo]

Fair enough, but many investors have been burned by Madoff style, LTCM, MF Global, Enron style players that turned out to be frauds. The notion that fraud only exists in crypto is patently false. MF Global was a prime bond dealer, for heaven's sake. So, true, exchanges are likely to be more solid, but some very trusted entities turned out to be fraudulent and conned extremely sophisticated investors.
The thing is - nobody in crypto denies that there are shady exchanges. But crypto haters all have this fantasy that 1) ALL crypto exchanges are equal and 2) conventional markets are totally fraud-free. It's hilarious the blindness.

The smart traders have learned which exchanges are legit and which are not. Binance was hacked once, they owned it in real time, it was minor and they made every user whole. The next time, they crushed the hackers who actually lost money on the attempt. It was beautiful and nothing since then.

MF global... that was the FCM fraud not exchange fraud or exchange going out of business
There is a diff.
However it is true that unlike SIPC Futures broker clients don't get that much protection.
Only in UK the FCA covers everybody

 

[traderjo]

Okay, this is irritating. I have REPEATEDLY said there is risk. I have NEVER denied it. I have explained it several times. There is some exchange risk, though most of it is perceived rather than real. Legit money will vet that risk, but they are not permitted by contracts and location to trade on unregulated markets.
There is risk of the trade moving heavily against you, forcing posting of additional collateral.

And yes, Bitmex has been seriously accused of market making schemes (and Bitfinex). Both are likely true. Binance, far less likely, and ftx has personally demonstrated to me their integrity, so I have my own reasons for trust on that score.

Sure you can trust it is your own money and sure that arb ( carry trade really) exists as you have shown however it is equally irritating that this thing is promoted as if "look here is a golden opportunity" without digging deep in to the risk side at the same time

 

[traderjo]

It’s a VWAP financially settled contract so it’s not deliverable was simply my point. And yes, it needs to track BTC for the futures to work. I’m glad that you’re doing a legit arb !

Bone
- Can this be called a legit arb? or just a SPOT future carry trade
- Somebody further in thread said that there is no cost of carry on the SPOT side? How though? the FiAT currency one needs to use to get BTC SPOT position means that capital is not earning interest so that is a cost !
- Also do you agree that the two will 100% converge on expiry of the OTC Futures contracts

In similar fashion I saw you tubers promoting GOLD SPOT CFD (OTC ) against GOLD Futures CFD ( OTC )... with a Market maker type OTC broker.... and if taht is so easy to do ( lie the BTC example) would a OTC broker like it?

 

[bone]

It’s more of a legit Arb than most trades I’ve heard called “Arbs” on this site. If you’re doing BTC spot vs. BTC futures - technically speaking its a basis trade, but other than the convenience yield there’s not much “basis” to it.

Bone
- Can this be called a legit arb? or just a SPOT future carry trade
- Somebody further in thread said that there is no cost of carry on the SPOT side? How though? the FiAT currency one needs to use to get BTC SPOT position means that capital is not earning interest so that is a cost !
- Also do you agree that the two will 100% converge on expiry of the OTC Futures contracts

In similar fashion I saw you tubers promoting GOLD SPOT CFD (OTC ) against GOLD Futures CFD ( OTC )... with a Market maker type OTC broker.... and if taht is so easy to do ( lie the BTC example) would a OTC broker like it?

 

[newwurldmn]

No, it's not. The futures curve can invert, leading to a loss. It's not predictable. That's because the curve is not stable. It flips, which would turn the trade into a loss. That, by definition, is not an arbitrage.
If you're referring to the perpetuals, they have a synthetic carry cost depending on whether they are above or below spot. That cost is re-figured every 1 to 8 hours, depending on the exchange. The cost can frequently be higher than the futures premium if it sustains, so it's not arb either.

What is the actual cost of holding Bitcoin?

not a market dynamic.

this is futures pricing 101.

 

[newwurldmn]

Unclear meaning. Please add details to clarify.

it was speculated on another chat that the margin makes the trade unattractive and the rising spot is to compensate for that. This does not appear to be the case.

 

[Same Lazy Element]

The delta between the cash and futures of SPX is the risk free rate adjusted for dividends.

There is a reason why EFP market exists - it's not really risk free rate but more like the mean funding rate for delta-one desks.

So then I ask again, what's your explanation that CME BTC futures trade at a premium if there is no counterparty risk with CME as you state the futures on non regulated exchanges trade higher because there is counterparty risk.

The futures trade at a premium to spot becuse of the inability to immediately collapse the arbitrage and thus exposing you to a margin mismatch on a tail move. The calendar basis is just a proxy for the spot margin basis and is an expectaton of a spot basis (that's why it's usually smaller than spot/prompt). This is especially true in cryto which does not have a developed funding/lending market. There is also a meaningful risk of getting a nasty settlement print that you can't trade

It's an arbitrage in a technical sense, but the microstructure makes it a risky arbitrage. Similarly, for example, a VIX settlement trade is an arbitrage in a technical sense but the microstructure makes it pretty risky and a well known firm has blown up on it.

It’s more of a legit Arb than most trades I’ve heard called “Arbs” on this site. If you’re doing BTC spot vs. BTC futures - technically speaking its a basis trade, but other than the convenience yield there’s not much “basis” to it.

By that definition, treasury basis is a legit arb - you should mention it to the couple teams that blew up at Millennium last spring.

it was speculated on another chat that the margin makes the trade unattractive and the rising spot is to compensate for that. This does not appear to be the case.

Cost of leverage in crypto is incredibly high and you don't need to do anything fancy as long as you can source leverage and take some mismatch risk. There is a whole yield farming industry doing this - while the risk is there, you get amply compensated for it.

 

[bone]

What’s the CTD on the CME BTC futures contract?

There is a reason why EFP market exists - it's not really risk free rate but more like the mean funding rate for delta-one desks.


The futures trade at a premium to spot becuse of the inability to immediately collapse the arbitrage and thus exposing you to a margin mismatch on a tail move. The calendar basis is just a proxy for the spot margin basis and is an expectaton of a spot basis (that's why it's usually smaller than spot/prompt). This is especially true in cryto which does not have a developed funding/lending market. There is also a meaningful risk of getting a nasty settlement print that you can't trade

It's an arbitrage in a technical sense, but the microstructure makes it a risky arbitrage. Similarly, for example, a VIX settlement trade is an arbitrage in a technical sense but the microstructure makes it pretty risky and a well known firm has blown up on it.


By that definition, treasury basis is a legit arb - you should mention it to the couple teams that blew up at Millennium last spring.


Cost of leverage in crypto is incredibly high and you don't need to do anything fancy as long as you can source leverage and take some mismatch risk. There is a whole yield farming industry doing this - while the risk is there, you get amply compensated for it.