This recent turn of discussion to Arbing the price differential is getting interesting.
It seems that there are 2 rules that are relevant to trying to Arb between two different fx firms.
The first rule is that an open position at one fx firm is non-tranferrable to another fx firm. This is an impediment to arbing.
The second rule is that we get charged a rollover fee if we don't settle a position within 2 business days. This implies that there is a delivery and settlement process for a position.
Hypothetically Speaking, let's say I get a quote from
Saxo: EUR/USD high 1.1382, low 1.1310
Refco: EURO/USD high 1.1386, low 1.1304
Is the following transaction allowed ?
I go Long the EUR/USD @ 1.1382 at Saxo and go Short EUR/USD @ 1.1386 at Refco. Instead of closing the position or electing to roll it over at Saxo, I instruct them to deliver the Euros and wire the Euro to either a bank or directly to Refco. Unlike most of fx customers,
I want to take delivery of the position.
For the sake of simplicity, let use 1 mini lot as an example. I bought 10,000 EURO for $11,382 USD at Saxo. I instruct them to debit the $11,382 USD from the cash deposit in my account and wire the 10,000 EURO to Refco. At this point, I will settle my position at Refo. I will deliver 10,000 EURO to them and they will have to credit my account with $11,386. Giving me an Arb of $4.
Obviously, $4 is not enough incentive to do this transaction. I would need to get a greedy fx firm whose spread is way too wide.
Is the mechanics of this transaction valid or are there rules/roadblocks setup at fx firm preventing me from doing this type of transaction?
Quote from North Pesos:
GirlPower,
for to talk of arbing, the situation have to be zero risk as a differential on instruments (futures vs options vs stocks) or intermarket's differential (e.g. NYSE vs TSE for Nortel). In each case you have a mechanism for to freeze the differential and take your profit without risk (e.g. you convert the options and sell immediatly the stock share, or you buy NT on NYSE on an account and sell it immediatly on the TSE).
You can also attempt to hedge or use other non-zero risk strategy as spread crossing on correlated stocks, but this is not arbing.
For the case of FX, if you have some differences between 2 FX brokers, you cannot take advantage of the differential, because you have to close your position with the same broker whose pay himself in the spread with some extra PIPS and send this money to the second FX brokers with the same extras PIPS spread. Each time you pay the spread which can ruin you with this kind of strategy. If you exclude this solution interbrokers with exchange of money, the only other strategy that a differential with 2 brokers can be play in theory is to that one lag «always» on the second. At his moment you play the first using the quote of the second, but don't forget that many condition will have to meet:
it will be surprising that the lag will be always in the same direction, also the spread have to be enought tight from your FX brokers for to play it. Also don't forget that the FX price is not the the true spot price, it come from inside their trades which attempt to follow the spot as an ECN will track the national bid/ask offer. Under this case, the mean and variance about their internal quote will fluctuate and not always in agreement with the true trend of the spot price, you can attempt to take advantage of that but this is not free risk as the arbing.
