if i had 10 cents for every arb I've seen...

[delta_1]

citing JackMorgan in the title here from this discussion thread:
https://www.elitetrader.com/et/threads/the-right-ib-order-type-for-arbitrage-attempt.366333/page-2

Seriously, this could be a good learning experience for everybody if we share approaches that seemed to have potential but didn't work out.
Most of you won't have a problem with sharing something that doesn't work.
I am not talking about bs you tried in your first week of trading...

Ok, I go first:

First story:

As described in above mentioned thread I tried a pair with a stock and it's ADR. Now, that it didn't work I can tell you the stock: "veon"
The ADR is trading on Nasdaq sometimes 20% below it's value in Amsterdam and when it gets closer to its value on the home exchange it's about 5% below the value in Amsterdam. It bounces so fast that I didn't consider the exchange rate risk.
I thought of two ways to arb this: long/short stock as described in the thread and
converting the cheap ADR into the stock and pocketing the difference.
The latter didn't work because the conversion fees are too high. IB charges USD 500 per conversion plus 5 Cent per stock...
So if you convert it cheaper at your broker you might achieve what I couldn't do

Second story:
I stumbled upon the pure archetype of a mean reversion trade. Coincidently looked up the chart of HCMC. That is exactly the perfect kind of chart you would want to see for a mean reversion. Subpenny but whatever. It goes from 1 to 2 and back 1 and 2 and so on...Like a ball that bounces pertetually between two walls for months! That is winning 100% every trade or winning 50% if you went shot at 2.
So I bought 100k at USD .0001. Can't really tell why the trade doesn't work but it took me forever to get executed. My sell order is in the order book to this day still at .0002 and doesn't get executed.
There are many buyers and sellers in line in front of me. That's what I think is the reason.

 

[MrMuppet]

Ok, first of all just discard anything posted by @JackMorgan
The guy has no clue and all he does is brag and shitpost. He couldn't execute an arb even if you wrote him a detailed manual. If he had 10cents for every arb he's seen that he was to dump to exploit he'd probably have 1$.

Second, arbing ADRs definitely works. I've done it myself and I know a trading house that makes markets for small cap ADRs in the away market and cover in home markets.

However (!), the stuff you are talking about is 90% infrastructure business and taking on second order risks.
Let's say you make a market in a secondary listing on NASDAQ Nordic, the home market is Indonesia. Your offer is filled at edge but you need to carry over your position while your secondary market is already closed and the prime market has not yet opened. Does your broker allow you to do that? Probably not....so you need to get a clearing house that allows you to carry over naked shorts into t+1 settlement so you can cover your position in the primary market.
In addition you have FX risk plus the risk that the primary market opens higher and your edge is gone.

Also if you do that you will need direct access to the respective exchanges. Doing that with SMART routing is impossible since you don't know where the order is going to go. And the last thing you want is your order going into a designated market makers auction book because he's your competition and he will fill you whenever he wants.
You don't get your order executed at 0.0002 because you do not have access to the execution venues where the volume is. HCMC is traded OTC meaning it does not have a centralized orderbook but is traded through OTC MMs order books, dark pools and multilateral trading facilities (MTFs). If you don't have access to these, your order is what everyone is leaning on.


I said it again and again. Do not use IB for this kind of stuff. IB has infrastructure for CTAs and wealth managers with all that compliance and reporting shenanigans.
IBs tech and execution capabilities are absolutely terrible and you're also limited because of it's automated risk management system that shuts down everything that deviates from anything that retail or money managers are doing.

To contribute to your actual thread:

Arb 101:

There are two different types of arbs:
1. Direct arb: Equal products, fungible, trades on different venues, e.g.. secondary listings
2. Risk arbs: Similar products, similar cashflow but not equal. Risk is relocated to second order, e.g. M&A, convertible bonds, derivatives


Direct arbs exist due to tech and infrastructure, capital restricitons, trade financing and regulation. This is doable for retail but there are absolutely no resources online. Key is settlement, venue access and interest paid on leverage.


Risk arbs are where the juice is. They exist because there is a risk premium paid on second or third order risks and your job is to evaluate if it's worth to carry that risk. This is absolutely doable for retail and infrastructure requirements are low compared to direct arbs. But you need to be able to evaluate the opportunity correctly.
A recent example would have been Elons Twitter buyout. If I remember correctly, TWTR traded just a couple of bucks below indicated takeover price (which is the risk premium in an M&A trade, because if you bet on the deal to happen, that's what you get for taking the risk that the deal goes bust)
However, a put spread could have been purchased for a pretty low debit to bet on the deal not going to happen and the risk/reward was insane on that one.

Kind of a hybrid example are currency NDFs that exist because the respective countries have capital controls in place that block or limit money from going in and out of the country. Bigger players cannot trade this kind of stuff, because....well, capital controls, so there is some food for the shrimp.
The issues are market access as well as the risk premium for settlement and legal issues.

Thai Baht NDFs pre 2008 come to mind and the most recent opportunities were Bitcoin during the HK protest era as well as the kimchi premium for crypto in general. Capital controls cannot apply to crypto in general so you could move the money and you needed to hedge your trade with derivatives to turn your KRW or Yuan into USD without an actual conversion.


Conclusion:
When you see an arb, it is most likely doable, the question is how. The next question is why it exists and if you find a way around those restrictions. If you're smart about it, you will find opportunity every day but not in the news or the internet. If you do stuff like this, you're on your own

 

[Gambit]

Guessing you need a prop firm for this.

Maybe Arb Group or Belvedere trading?

 

[maxinger]

 

[MrMuppet]

Guessing you need a prop firm for this.

Maybe Arb Group or Belvedere trading?

Not necessarily. You need a niche that you can exploit for more than your costs are for doing it.

If you can get a comsumer loan for 2% which you convert into ETH, stake that for a 4% yield and hedge the position with a futures contract at a 2% premium, you don't need a prop shop for doing so.
It is a risk arb depending on how you setup your business and where you hold your positions and it's your job to evaluate if the 4% you make from that position covers the counterparty risks

 

[Lucas_Paul]

Not necessarily. You need a niche that you can exploit for more than your costs are for doing it.

If you can get a comsumer loan for 2% which you convert into ETH, stake that for a 4% yield and hedge the position with a futures contract at a 2% premium, you don't need a prop shop for doing so.
It is a risk arb depending on how you setup your business and where you hold your positions and it's your job to evaluate if the 4% you make from that position covers the counterparty risks

Where are you getting that 2% consumer loan with todays CB rates, tho?

 

[Gambit]

I never considered staking yield as a carry trade. Btw I will send you a dm on a crypto carry trade I found on Twitter. Thank you for your insights.

 

[Gambit]

Where are you getting that 2% consumer loan with todays CB rates, tho?

Toy example. Also could borrow from another currency with lower rates.

 

[Lucas_Paul]

Toy example.

I know.
My point was that there's a reason for rates and "staking yields" to be priced as they are. Everyone is in competition with each other. No free lunches. But this thread already covers this.

Also could borrow from another currency with lower rates.

And what's the cost of hedging currency risk?

 

[Lucas_Paul]

I never considered staking yield as a carry trade. Btw I will send you a dm on a crypto carry trade I found on Twitter. Thank you for your insights.

Be careful staking crypto. Higher rates are higher for a reason. Someone has to PAY that yield to YOU. Now, why? It's possible only during times of bubble where sentiment is in greed mode for quite some time. But if you can figure that out, then why bother with those (low) yields if you can just buy the (rocketing) underlying?