International ETF Arb.

H

HezBallah

Hello everyone,

I've been trying my best to independently figure out how certain firms (SIG, Jane, FNY's international arb desk) figure out where certain international ETFs should be priced when the actual markets are closed. For example, EEM trades in the US during 9:30 to 4pm. However, certain countries and stocks in EEM are not trading. How to you figure out the NAV or fair value of this thing? Apparently one thing that SIG and DRW focus on is the fair value of the ETF via some proprietary formula (I assume this formula is based on how the US did today, whether we are up or down, whether the dollar is up or down, etc.).

Where do I go from here?
 
I realize my question is asking for answers without providing much. The least I can do is explain a bit about why I'm asking. I'm currently a trader at a small prop firm who specializes in domestic equity. I do fairly well but I worry that my niche is small and becoming quickly saturated. I want to expand my knowledge of trading into other areas and I've been trying my best to observe everything in the domestic markets... but I haven't been able to learn much about international arb or traders in other markets involving options. I simply don't have access to them at my firm. So... I came here.

Also, I hope to provide some interesting discussion. I hope this can go somewhere.

-Hezballah
 
Just a wild guess but plain old supply and demand might be most of the pricing.

Unless there is specific news on a stock(s) in the etf, then no one knows what it 'should' be trading at. There is no formula that can price what all the stocks will trade at tomorrow. So the price is set at trading equilibrium, the mm makes his spread, and everyones happy.
 
Look at this paper on trading mutual funds with stale prices for some ideas:

http://pages.stern.nyu.edu/~rwhitela/papers/fundtiming faj02.pdf

I think I have seen 3 or 4 others like this, but don't remember anything with a dramatically different approach. Just brainstorming, if you can run regressions you can try building a model like theirs and adding some of the other factors you mentioned as "signal assets." The fact that the ETFs continue to trade while the markets for the underlyings are closed (unlike the mutual funds they use) opens up more possibilities. But SIG and the others may have thought of this already!
 
Just a wild guess from me and no offense intended but there is something about your screen name which doesn't make you very inviting to join a discussion with lest we have to worry about every unknown car which parks in front of our houses should the discussion go south. De donde?
 
You must log in or register to reply here.
Back
Top