Is arbitrage really risk-free?

[0008]

Near every text book says arbitrage is risk-free. If it was true, why didn't all the institutions trade on it and never had any loss?

 

[karabugla]

because the spreads are gettin smaller and smaller and have been gettin even more smaller since the decimalisation.
further the institutions still do arbitrage (futs vs. cash) but as you can imagine they´- like all the other big players - use computers for it.

 

[metooxx]

Quote from 0008:

Near every text book says arbitrage is risk-free. If it was true, why didn't all the institutions trade on it and never had any loss?

No; your primary risk is execution, with a little event risk thrown in ...

 

[bungrider]

Quote from metooxx:



No; your primary risk is execution, with a little event risk thrown in ...

...then there's the risk of an options exchange breaking trades will-nilly....am i right or am i right, metooxx?

 

[metooxx]

Quote from bungrider:



...then there's the risk of an options exchange breaking trades will-nilly....am i right or am i right, metooxx?

All the time; or not honoring posted prices ...

 

[chasinfla]

take back
your insurance
baby, nothing
is guaranteed

<font size=1>-- tom petty</font>

 

[Mercury77]

Quote from 0008:

Near every text book says arbitrage is risk-free. If it was true, why didn't all the institutions trade on it and never had any loss?

No

 

[onelot]

Quote from metooxx:



No; your primary risk is execution, with a little event risk thrown in ...

Metooxx, when you say event risk do you mean IT failures...?

 

[metooxx]

Quote from onelot:



Metooxx, when you say event risk do you mean IT failures...?

That is execution risk to me.

Event risk would be an arb that you hit and your exit isn't honored and the underlying is ripping against your position.

And they won't let you out for anything ...

 

[onelot]

Quote from metooxx:



That is execution risk to me.

Event risk would be an arb that you hit and your exit isn't honored and the underlying is ripping against your position.

And they won't let you out for anything ...

do they not let you out by continually not honoring their prices and basically just running you? i know there's some complaint process you can go through to try and get reimbursal, probably doesn't work though, but was wondering if you have tried that route before and if anything came of it.