Inter-index intraday spread trading

I've gone to the yahoo.com finance page (from the main page, click on the
markets link). If you go there, you'll see that you can get a graph of
the nasdaq, dow, and s&p indices (they seem to show the nasdaq and dow by
default, so I mouse over s&p to see that one). What I see is some correlation
between the markets; in fact the dow & s&p are highly correlated, except when
they're not. I noticed that, for example, the dow may be down 1.2% and the s&p
down 1.4% at some point in time. At another point in time it may be 1.3% vs.
1.25%, and at another point in time they may be both down 1.35%. I am not
concerned with why there is a correlation between the dow and s&p, just
concerned with how to make money when they're not perfectly correlated.
So, I think that if I could sell one futures contract and buy another,
say, sell the dow and buy the s&p when there is a 0.2% difference in
their relative values (down or up from the previous days close), then wait
until there is just a 0.1% difference in their relative values, I'd
make 0.1% on the contracts (liquidating both when there is a 0.1% difference).
0.1% is about $60, given the current value of the YM and ES contracts.
It seems to be a low-risk/small-gain trade.

Yeah, yeah, I know, $60 isn't much.
But I prefer to get rich slowly.
Plus, once legged-in to this thing the perf. bond is way low,
so it may be possible to do more than one at a time.

What could go wrong with this strategy? I know that this "spread" might go
against me, or that the "spread" might not close before the end of the day.

Any comments?

Mods: I will only do a "journal" about this if there is interest, so feel free to move this thread to another area.
 
Quote from Trader273:

That just makes me laugh :)
Why are you laughing? I don't mind -- laughing is good for you. Do you think that they are not correlated? It seems to me that if they are correlated, except when they're not, that there is an "edge" -- a market inefficiency -- there when they become uncorrelated.
 
Quote from dozu888:

yes, definitely an edge.

congratulations millionaire.
Ah, you've restored my faith in ET, so I'll proceed.

I've sampled the dow and s&p at times, for several days, intraday, at yahoo's web site and observed this phemomenon.
I am a doubter, though. So, I've started collecting data via IB's API, collecting SPX and INDU and confirmed that this "spread" exists and varies!
Only two days worth of data, so far, and only the first day's data checked. I will be surprised, if it is not a regular occurance.
 
I know very large hedge funds that trade exactly like this... look at longer term charts, not just intraday. Lower risk means you can take bigger size, i say go for it, but do research first
 
you can always hire a back-office guy and pay him crap to meticulously arbitrage the indexes. just hope he doesnt take one side and leave the other off.
 
Quote from rosy2:

you can always hire a back-office guy and pay him crap to meticulously arbitrage the indexes. just hope he doesnt take one side and leave the other off.
Yeah, that is one of the big risks here: failure to leg into the trade. I am going to have to check whether the "spread" only closes when the market moves fast or only becomes wide when the market moves fast -- slippage could be a problem.
I am sure that it might be difficult to do this sort of trade manually.
 
You could probably use TT (or another execution platform) set up a spread for you, it would take some of the execution risk out. Or just piece into it... if you plan on doing 10 spreads do 1 at a time, should reduce execution risk.


Quote from doli:

Yeah, that is one of the big risks here: failure to leg into the trade. I am going to have to check whether the "spread" only closes when the market moves fast or only becomes wide when the market moves fast -- slippage could be a problem.
I am sure that it might be difficult to do this sort of trade manually.
 
Quote from 5yrtrader:

I know very large hedge funds that trade exactly like this... look at longer term charts, not just intraday. Lower risk means you can take bigger size, i say go for it, but do research first
Yeah, I suspect that it isn't necessary to close the trade by end of day.
 
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