FX SPOT/Currency Futures Spread
- Thread starter scalpmaster
- Start date
Quote from Buy1Sell2:
Ok I'll throw you a bone since you seem to be determined to give it a try. I've been down this road and feel that the risk is too great. When you go this route you expose yourself to a high degree of execution risk, betting on the fact that you can get filled in two markets at prices that will allow you to make a profit from a price shock in one of the markets (but not in the other).
My findings were that to benefit from this you basically have to autoquote the futures market, and hope to get a fill on a futures spike that isn't "real" or that isn't mirrored in the cash market. The risk is that you get filled on the futures and the spike is real on the cash, so you become exposed to fill risk on the cash side of things before you can get an execution.
There are opportunities but they exist primarily in the less liquid futures, and only for split seconds at the more volatile times, when liquidity is thin and markets are moving quickly. If you can offer liquidity at those times you can make some easy money. But the risks are real and in the end I couldn't justify trading the method.
Why do you need to be "short spot/long future" to take advantage of a price "shock" that brings one market out of line with the other? The idea is along the same lines of all those threads that advocate "going long EUR/USD and short EUR/USD at the same time, and take advantage of/close out profitably whichever position spikes first". It's just an extra round trip that's completely unnecessary for the objective of the trade.
If the futures go out of whack momentarily from where the premium/discount should be compared with spot, you just buy/sell the futures, then close out the position once the market gets "back in line" -- a quick scalp. You don't need to be hedged with spot, or more specifically, the spot hedge won't matter, you will just have an extra position to close out once you've taken advantage of the futures getting out of line.
Ok, now that I see that there are at least a few guys out there that are able to answere there "FX arb" type questions, I'll end my advice here. If anyone who has been following this thread has still not understood that trying to arb FX is fruitless, I would strongly suggest resisting trading untill it is clear why arbing FX is a futile quest.
I hope I've helped contribute to a better understanding of market mechanics.
I hope I've helped contribute to a better understanding of market mechanics.
I agree and that's the way I implemented it because you simply can't count on a fill in the spot market when it is "out of line", but you can sometimes get one in the futures. And on further reflection you're also right about the extra fill being a waste. The original poster was looking for a "riskless arb" and I was trying to be "helpful".
Bottom line: there is lots of risk any way you try to take advantage of price shocks and I'll just repeat for the original poster that in my actual (not theoretical) experience it just wasn't worth doing, meaning the risk was greater than the reward justifies.
~Patrick
After seeing a few more of "scalpmaster's" threads I'm starting to buy into illiquid's "shill" theory. This is it for me on this subject!