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

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MrMuppet said:
Disagree here. When we're talking about bilateral loan agreements Depends on the individuals default probability which is tied to the strategy and not to volatility.

Imagine you approach a lender. 15 years live track record, 3 losing months overall, your strategy is neutral gamma and long tails, inventory is small and always squared off overnight and you have a detailed strategy description and a business plan. In other words you're a money making machine and you've proven it.
Big loan, reasonable interest rate, low collateral requirements.


On the other side, you trade equities long/short intraday for 3 years, most of your months are +/- 0 or up small, 5 losing months per year and in two months you were up 30%. Your strategy is reading the news and drawing lines on a 5min chart.

Even if you overcollateralize your loan, nobody would give you a cent
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Yeah, you're talking about a borrowers credibility (basically your credit rating). I 100% agree here.

I was just referring to brokers lending behaviour towards retail traders. IB, for example changes margin requirements based on underlying volatility and/or upcoming possible force majeure events. Noone wants to get caught in the "floor collapse of the swiss franc" type of scenarios again.
 
newwurldmn said:
brokers have limits on that (balance sheet limits) often related to your equity balance as.
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Sure, some have higher limits and some have lower limits.
Same with the strategy to short T-Bills that I mentioned.
There will be some upper limit on the leverage of the entire portfolio.

We are talking about a strategy that has been at the core of banking for hundreds of years: borrow cheap and lend at a higher rate. Definitely not easy to immitate with a 100k account size.

@Lucas_Paul: "IB, for example changes margin requirements based on underlying volatility and/or upcoming possible force majeure events."

Yes, that risk has to be taken into account but that is always the case with any kind of leverage. No matter whether you look at financing with a margin loan or trading a futures contract with embedded leverage. The volatility can wipe out your equity. That is part of the deal.

"everyone can take a margin loan with a margin account with enough collateral, this isn't the discussion"

Well, that is true but there is a huge huge difference at what price you can do that. Margin loans of many of the retail brokerages a quite expenssive. Margin loans of IB are the cheapest I know.

What I am argueing is that with a box spread you can manage to borrow (almost) as cheap as big institutions. That allows you to look for some fixed income instrument with a slightly higher return.
The box spread is something special. Doing something as a retailer that will put you in a position similar to big institutions by borrowing at close to LIBOR is amazing. Usually we have a disadvantage compared to the big boys in the market.
I think learning the aspects where you have an advantage over them is really valuable.
Like we are not as they are - there are lots of opportunities in that fact alone...
 
delta_1 said:
Sure, some have higher limits and some have lower limits.
Same with the strategy to short T-Bills that I mentioned.
There will be some upper limit on the leverage of the entire portfolio.

We are talking about a strategy that has been at the core of banking for hundreds of years: borrow cheap and lend at a higher rate. Definitely not easy to immitate with a 100k account size.

@Lucas_Paul: "IB, for example changes margin requirements based on underlying volatility and/or upcoming possible force majeure events."

Yes, that risk has to be taken into account but that is always the case with any kind of leverage. No matter whether you look at financing with a margin loan or trading a futures contract with embedded leverage. The volatility can wipe out your equity. That is part of the deal.

"everyone can take a margin loan with a margin account with enough collateral, this isn't the discussion"

Well, that is true but there is a huge huge difference at what price you can do that. Margin loans of many of the retail brokerages a quite expenssive. Margin loans of IB are the cheapest I know.

What I am argueing is that with a box spread you can manage to borrow (almost) as cheap as big institutions. That allows you to look for some fixed income instrument with a slightly higher return.
The box spread is something special. Doing something as a retailer that will put you in a position similar to big institutions by borrowing at close to LIBOR is amazing. Usually we have a disadvantage compared to the big boys in the market.
I think learning the aspects where you have an advantage over them is really valuable.
Like we are not as they are - there are lots of opportunities in that fact alone...
More...

the box spread goes against that balance sheet limit.
 
MrMuppet said:
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
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Great post that clarifies a lot. Just a question about the terminology: What do you mean by second (third) order risk?
 
trade4succes said:
Great post that clarifies a lot. Just a question about the terminology: What do you mean by second (third) order risk?
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let's take an index future as an example.

first order risk is outright movements of the index.
Second order risk would be forward premium/discount which consists of interest rates and dividends.
Third order risk would be the interest rate you pay on your margin.
4th order risk is the counterparty risk of your broker
 
delta_1 said:
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...:sneaky:

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.
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Arbitrage in the strictest sense of the word would be an almost reckless transaction.

With stock market deal arbitrage you hopefully get rid of meaningful market risk, industry risk and stock risk. However, you are left with a new risk:

Deal Risk!

Quite a few deal-arb guys have blown up or taken crazy losses by taking on too much deal risk.
 
delta_1 said:
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...:sneaky:

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.
More...
 
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