Complex trades AND quick settlement?

B

b1tr0t

I have been working with the IB TWS API for most of the year. IB's platform offers good spreads, quick execution, and a decent trading API.

Unfortunately, IB FX trades typically settle in two days. This is acceptable for simple directional trades (USD->EUR followed by EUR->USD, for example), but introduces significant interest risk to trades that involve more than two currencies.

With TWS, I can execute the following set of trades:

USD->EUR
EUR->GBP
GBP->USD

If it is Monday, and there are no holidays, this set of trades will execute perfectly. If tomorrow is a holiday in the EU, but not in the UK or USA, then my set of trades will not settle simultaneously. The USD->GBP trade will settle in two days, but the USD->EUR and EUR->GBP trades will settle in three days. This will create a hedged short position in GBP. This, in turn, will incur one day of interest cost, often wiping out the profit of the trade-set.

What broker should I work with that supports:

(1) a trade API (C++ is ideal, Java, C#, or FIX is also acceptable)
(2) support for complex trades
(3) 1-day or 0-day trade settlement
 
FX is always T+2, except for CAD which is T+1. This has nothing to do with the broker. It has to so with the way banks clear funds.

This is just the way it is. If your strategy is dependent on one day of interest income that gets messed up a handfull of days out of the year then perhaps you should find a more robust strategy.
 
<i>FX is always T+2, except for CAD which is T+1. This has nothing to do with the broker. It has to so with the way banks clear funds.</i>

It looks like trades can be settled <a href="http://www.cls-services.com/sectiondetails.cfm?objectid=BB493258-FB0E-4C79-B87AD9ECA4514CEC">within 24 hours</a> with the <a href="http://www.cls-services.com/index.cfm">CLS</a> system. Plenty of <a href="http://www.cls-services.com/whoswho/members.cfm">banks are members</a>, so it seems that some brokers would offer more rapid settlement times.
 
From their website:


Foreign Exchange Risk

To what extent do you currently record and manage the settlement risk? How important is it for you? If you trade generally with larger banks you may feel that the real risk is small. Conversely, you may want to reduce your risk on smaller banks.

Changes To Procedure

Differences will exist in the way deals are struck and settled when using CLS, even as a third party. A confirmation of the trade will have to be copied to your appointed Settlement Member at the time of the deal. Your settlement process will be different. You will now have to settle through the Settlement Member, and you will have to agree upon the method of settling. It may also be necessary to hold nostro accounts with the Settlement Member, which will require funding. For non-CLS trades, the existing process must continue, therefore the two will have to operate together.

Costs

Inevitably, changes to systems will incur an expense. The costs associated with individual payments for each trade will disappear, but your Settlement Bank will still charge for each trade. Therefore, several questions may arise such as: “What will the overall impact be if new nostro accounts are required?” and “What will these accounts cost to maintain?”


Interesting, but it remains to be seen if this will take off. I don't know of anyone who uses this system. Furthermore, I don't know if the cost will be worth the reduction of a day or two of settlement risk. My opinion is that small crappy banks/brokerages that have trouble getting credit lines with larger counterparties might find this useful, but not sure it's worth the cost for the top 5 FX banks to switch. This is completely a credit risk issue.

Remember...if someone has to bust their ass to settle your tiny FX trade within 5 hours it will cost you...probably more than the money you are losing elsewhere.

Anyway, if a bank has to rely on this system to deal with others then it might not be a place that you want to be associated with.

My original point stands...if you are worried about a lag in settlement then you should rethink your strategy.
 
Quote from b1tr0t:

I have been working with the IB TWS API for most of the year. IB's platform offers good spreads, quick execution, and a decent trading API.

Unfortunately, IB FX trades typically settle in two days. This is acceptable for simple directional trades (USD->EUR followed by EUR->USD, for example), but introduces significant interest risk to trades that involve more than two currencies.

With TWS, I can execute the following set of trades:

USD->EUR
EUR->GBP
GBP->USD

If it is Monday, and there are no holidays, this set of trades will execute perfectly. If tomorrow is a holiday in the EU, but not in the UK or USA, then my set of trades will not settle simultaneously. The USD->GBP trade will settle in two days, but the USD->EUR and EUR->GBP trades will settle in three days. This will create a hedged short position in GBP. This, in turn, will incur one day of interest cost, often wiping out the profit of the trade-set.

What broker should I work with that supports:

(1) a trade API (C++ is ideal, Java, C#, or FIX is also acceptable)
(2) support for complex trades
(3) 1-day or 0-day trade settlement
More...

That's exactly how the FX market works. The "triangular arb" trade that you want to put on will not work.
USD->EUR
EUR->GBP
GBP->USD

The ony reason that you are seeing "free money" is because the market takes into account the interest charges.

When there is a holiday in one location then settlement dates of the 3 pairs will not be equal. The market will take this into account and price the pairs accordingly. The result is that this triangular arb "appears" to offer free money.

All you will do with this trade is haemorrhage your cash by paying the spread, interest charges and commissions.
 
<i>Oanda, instant settlement.</i>

But do they support complex trades? At the beginning of this year, they only supported directional trades.
 
Quote from b1tr0t:

I have been working with the IB TWS API for most of the year. IB's platform offers good spreads, quick execution, and a decent trading API.

Unfortunately, IB FX trades typically settle in two days. This is acceptable for simple directional trades (USD->EUR followed by EUR->USD, for example), but introduces significant interest risk to trades that involve more than two currencies.

With TWS, I can execute the following set of trades:

USD->EUR
EUR->GBP
GBP->USD

If it is Monday, and there are no holidays, this set of trades will execute perfectly. If tomorrow is a holiday in the EU, but not in the UK or USA, then my set of trades will not settle simultaneously. The USD->GBP trade will settle in two days, but the USD->EUR and EUR->GBP trades will settle in three days. This will create a hedged short position in GBP. This, in turn, will incur one day of interest cost, often wiping out the profit of the trade-set.

What broker should I work with that supports:

(1) a trade API (C++ is ideal, Java, C#, or FIX is also acceptable)
(2) support for complex trades
(3) 1-day or 0-day trade settlement
More...

Do you really think a simple thing like triangular arb will be mispriced in today's world with so many computers humming away!?
 
Quote from MTE:

Do you really think a simple thing like triangular arb will be mispriced in today's world with so many computers humming away!?
More...


Do you really want to have a philosophical discussion on the efficient market hypothesis?

I'm not looking for advice on my strategy - I'm trying to figure out how best to test and execute it.
 
Quote from b1tr0t:

Do you really want to have a philosophical discussion on the efficient market hypothesis?

I'm not looking for advice on my strategy - I'm trying to figure out how best to test and execute it.
More...

Nope! By the way, this is not an efficient market hypothesis discussion, it's an arbitrage discussion. Triangular arbitrage is a clearly defined relationship not some theoretical hypothesis.

As Steve has pointed out above, the risk of different settlement dates is priced in.
 
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