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

[M.W.]

I highly doubt that having professionally worked in this particular industry for a very long time. A decade ago a firm mispriced binary options and was promptly taken to the cleaners, that's how fast arbitrage opportunities are taken advantage off. There is no way any public brokers post such wide rollover rates that they can be arbed against another broker. But hey, if you find a dummy, squeeze them to death they then obviously deserve it. I just don't think such exist today.

I do not want to be too specific. But there are still opportunities, just do your own search.

 

[TheDawn]

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.

I bet you that's how IB makes its money, one of its most lucrative ways I am sure.

 

[VicBee]

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

Wow! The most detailed explanation post I've ever read on ET. How refreshing.

I'll stick to trading US stocks, thank you.

 

[MrMuppet]

Wow! The most detailed explanation post I've ever read on ET. How refreshing.

I'll stick to trading US stocks, thank you.

or perhaps you put on a little ellbow grease and dive into it...you might find something

 

[Lucas_Paul]

because instead of buying something for 100k that might 10x or not I'd much rather borrow 100m for 3% floating and put it into a hedged carry trade that yields 10% fixed p.a.
When it crashes, borrowing rates go down and I increase my profit and when it pumps I can hedge my DV01 with futures spreads.

I want to provide liquidity for the monkeys that bet on price and need leverage for that.

Wait...someone is willing to lend you 100m for 3% yield?

 

[MrMuppet]

Wait...someone is willing to lend you 100m for 3% yield?

depending on your network of lenders, your credit rating and history with them and your infrastructure it's perfectly doable.
I mean we're not talking about the 3b loans that 3AC scored for about 10% p.a. when the BTC carry was still at 40%.
The lenders borrowed from retail at 6-8% p.a. and made a nice profit on that. And they would have kept it if they knew how proper credit scoring worked^^

A 100m margin loan isn't much to write home about if you consider that you get 500k buying power for your 25k FX account asuming a 1:20 leverage...and that's without any due diligence and credit scoring on the lenders side.

Market market making operations do that all the time, especially HFTs. Their profit margins typically range from 0.05cts-0.1cts per share on a >50$ stock while doing 5-10k trades per day per stock.
Scale that up to about 1000 stocks and you can imagine how much buying power you need to even put these inventories on.


I admit, retail punters will never get access to loans like that, because they are not big enough, not connected enough and don't treat trading as a business (-> no idea why and how to make money, no business plan, not full time). So from a retail perspective 100m seems a bit steep

 

[delta_1]

Wait...someone is willing to lend you 100m for 3% yield?

There are several ways to achieve this kind of borrowing yield. One would be to short T-Bills and hedge the interest rate risk...
IB seems to offer that if you borrow at least 5 million.
https://ibkr.info/article/3419
With 1 % margin that would be an extremly cheap way to borrow assuming they do let you use the money and not keep it seperate. In the hedge fund world this financing approach is far from unusual...

 

[Lucas_Paul]

I admit, retail punters will never get access to loans like that, because they are not big enough, not connected enough and don't treat trading as a business (-> no idea why and how to make money, no business plan, not full time). So from a retail perspective 100m seems a bit steep

There you go. Why talk about what big institutions get access to? How is that comparable with what YOU can do?

There is no "consumer loan" with 3% yield. If there is, please point me (a consumer) to one.

Let's stick with what is possible to retailers.

 

[MrMuppet]

There you go. Why talk about what big institutions get access to? How is that comparable with what YOU can do?

There is no "consumer loan" with 3% yield. If there is, please point me (a consumer) to one.

Let's stick with what is possible to retailers.

Why are you under the impression that I cannot do it?
I never said that everyone can do it but the way I'm setup, it's totaly possible for me to get an 8 digit margin loan at a variable interest rate.

 

[VicBee]

or perhaps you put on a little ellbow grease and dive into it...you might find something

I just started trading stocks 3 years ago... Plenty challenged as is.