Arbitrage Strategy

[Rationalize]

Quote from bone:

I have done consulting work for two very prominent HFT electronic trading firms in Chicago and Manhattan [ household names in the biz you would instantly recongnize ] - they both spread trade equity pairs and baskets on an automated basis at very high frequencies, and they both call it 'stat arb'.

One of the firms does so much volume, it actually owns a brokerage named after a citrus fruit.

The other firm does so much volume they really should have their own brokerage - if there was any money in it to be had.

Taking little nibbles out of highly correlated spread differentials on a milliseconds timeframe. All day long.

+1

I would add that a lot of high frequency stat arb is reliant on bid/ask spread capture to maintain an edge, with the other leg(s) serving as little more than a liquid dirty hedge. (Spread capture probably trumping the mean reversion aspect on shorter timeframes).

Quote a price on anything, so long as the spread is wide, and there's a pseudo-replication to lay off onto.

I like to think of it as generalized market making, with balls.

 

[bone]

Quote from Rationalize:

+1

I would add that a lot of high frequency stat arb is reliant on bid/ask spread capture to maintain an edge, with the other leg(s) serving as little more than a liquid dirty hedge. (Spread capture probably trumping the mean reversion aspect on shorter timeframes).

Quote a price on anything, so long as the spread is wide, and there's a pseudo-replication to lay off onto.

I like to think of it as generalized market making, with balls.

Yep, that's another way to do it and to think about it. Point is, with the more prominent firms nobody wants to take "flat price directional risk" if they can help it - which means some sort of arbitrage or spread or some flavor of relative value strategy ( hedged or unhedged ). The combinations and permutations are are almost limitless - creative souls do really well in this environment. And making markets to capture the bid-ask spread based upon the sizing and price of your analog hedge is definitely a very good strategy.

 

[syswizard]

Quote from Rationalize:

(Spread capture probably trumping the mean reversion aspect on shorter timeframes).

Do explain why.

Quote from Rationalize:
Quote a price on anything, so long as the spread is wide, and there's a pseudo-replication to lay off onto.

Wide sounds arbitrary. How is that determined ? 1 or 2 sigmas from a normal spread ? Also, what is pseudo-replication exactly in this context ?

 

[syswizard]

Quote from Lornz:

As I tried to point out in my previous post: statistical arbitrage is referring to a specific form of trading, it is not outright (deterministic) arbitrage.

Deterministic arbitrage does not exist....at least not in the book of investment / trading terms:
http://www.investopedia.com/search/default.aspx?q=arbitrage#axzz1iKeTln50
stat arbitrage
conversion arbitrage
currency arbitrage
merger arbitrage
regulatory arbitrage
fixed income arbitrage

 

[Lornz]

Quote from syswizard:

Deterministic arbitrage does not exist....at least not in the book of investment / trading terms:
http://www.investopedia.com/search/default.aspx?q=arbitrage#axzz1iKeTln50
stat arbitrage
conversion arbitrage
currency arbitrage
merger arbitrage
regulatory arbitrage
fixed income arbitrage

http://books.google.no/books?id=hTw...A#v=onepage&q=deterministic arbitrage&f=false

 

[bone]

Gents, you will not find the most currently exploitable arbitrage strategies in a text book or through an internet search. What correlated and worked a few months ago ( or weeks or days for that matter ) might be completely irrelevant these days.

There exists legions of quants who are employed to do nothing else but to ferret out these opportunities.

I have never found an exploitable arbitrage edge or idea in a trading book. Seriously.

 

[Lornz]

I don't know if you're referring to me or not, but I was simply pointing out that "statistical arbitrage" and "deterministic arbitrage" are specific terms in finance. There seemed to be a lot of confusion in this thread.

I have no interest in discussing edges.... Why would I want to do that?

 

[syswizard]

Sorry guys, my bad: WikiVest had it all along...

Deterministic arbitrage takes advantage of price differences for the same (or similar) assets on different markets. When such price discrepancies exist it is possible to sell short the asset that is overpriced on one market and buy the under-priced asset on the other market. Assuming their prices converge to a correct and equal value, the arbitrageur has earned a profit without any risk.

 

[Rationalize]

Quote from bone:

Yep, that's another way to do it and to think about it. Point is, with the more prominent firms nobody wants to take "flat price directional risk" if they can help it - which means some sort of arbitrage or spread or some flavor of relative value strategy ( hedged or unhedged ). The combinations and permutations are are almost limitless - creative souls do really well in this environment. And making markets to capture the bid-ask spread based upon the sizing and price of your analog hedge is definitely a very good strategy.

Agreed .. but there can be a fair bit of "arithmetic" involved in selecting and pricing off an analogue(s).

 

[bone]

Quote from Rationalize:

Agreed .. but there can be a fair bit of "arithmetic" involved in selecting and pricing off an analogue(s).

That's where all the fun is.