Pure Arbitrage...Still in Existence?

B

bvam1

Correct me if I am wrong, but isn't there a pure arbitrage opportunity whenever the QQQQ is trading at a premium or discount to its NAV. People can always create or redeem QQQQ shares at its NAV, and pocket the premium/discount.

On July 8 and 11, the premium at closing were .73 and .35 per share respectively. What I don't understand is that if people can arbitrage whenever there a premium/discount, how come the premiums had gotten so high? I expect much competition to exist in these circumstances to drive any premium/discount down/up to its NAV level immediately.

The fact that premiums were allowed to go up so high on July 8 and 11 suggest that not too many people are arbitraging the QQQQ. I don't understand why many people would forego such opportunities. Or is there something I don't understand?

*Note: Ignore transaction cost because it's neglible to the big guys!
 
no, if you go to www.nasdaq-100.com you will see that July 11's NAV was 38.13 and the closing price was 38.12

I don't think the NAV is precisely the NDX divided by 40 - there are probably some technical details

Thus, not really any arb
 
Quote from stock777:

Study up on futures pricing. What you think you see does not exist.
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Actually QQQQ ETF does not have the risk free rate built in since the underlying is the actual stock itself.

The only way to arb the NAV is to buy all 100 underlying stocks of the NDX and exchange them at NAV, then sell the QQQQs you receive on the open market at a profit. ONly big institions do this since to buy a basket of 100 stocks at the correct proportions and with little transaction cost is prohibitive.
 
I apologize for the inaccurate pricing of NAV on July 11. Apparently, I have mis-recorded the NAV on several days. Too late to check for it now, there's no historical NAV to be found!

But I've been keeping track of the discount/premium, and I've seen premiums go up as high as .73 per share.

Landboy,

I don't know what you mean by "prohibitive"...anyhow, if premium is as high as .73 per share, you don't have to buy a basket of 100 stocks at the correct proportions because the premium is high enough to allow a small error. Besides, how hard it is to buy 100 stocks simutaneously? As long as your volume per transaction is small, you'll get instant fills and minor errors on basket orders.

Transaction costs to large institutions are relatively minute. At premium of .70 per share, they'll probably pocket .5 per share, at least; unless there are additional fees/costs besides transaction costs that I am still not aware of. How is it possible that the trading community allows such profitable arb. to go uncontested?

As for Stock777,

What does futures pricing has to do with anything? This arbitrage can be done buy shorting QQQQ and buying 100 stocks it's tracing. No futures short/long is involved!
 
Well, let's assume you can get a really good deal on commissions and such, it isn't actually pure arbitrage, so you'd need to time it exactly right. NAV is striked daily by I think 5 oclock EST. So let's say today is Monday, you buy 100 stocks in correct proportion during MOnday afternooon. YOur average cost is 39 dollars. YOu better hope in hell that the Qs keep moving up, coz you can ONLY exchange at the MOnday 4 o'clock close NAV. THEN, there's the trouble of selling your newly received Qs, you better hope AGAIN that the market doesn't gap down in the morning, compounding another loss



Quote from bvam1:

I apologize for the inaccurate pricing of NAV on July 11. Apparently, I have mis-recorded the NAV on several days. Too late to check for it now, there's no historical NAV to be found!

But I've been keeping track of the discount/premium, and I've seen premiums go up as high as .73 per share.

Landboy,

I don't know what you mean by "prohibitive"...anyhow, if premium is as high as .73 per share, you don't have to buy a basket of 100 stocks at the correct proportions because the premium is high enough to allow a small error. Besides, how hard it is to buy 100 stocks simutaneously? As long as your volume per transaction is small, you'll get instant fills and minor errors on basket orders.

Transaction costs to large institutions are relatively minute. At premium of .70 per share, they'll probably pocket .5 per share, at least; unless there are additional fees/costs besides transaction costs that I am still not aware of. How is it possible that the trading community allows such profitable arb. to go uncontested?

As for Stock777,

What does futures pricing has to do with anything? This arbitrage can be done buy shorting QQQQ and buying 100 stocks it's tracing. No futures short/long is involved!
More...
 
Computer programs keep all the ETF's risk arbd within an inch of their life. I'd say within .02 on the QQQQ's at all times, most times .01. Why? Because many can trade for .001/share AND get ECN rebates. Multiply that by millions of shares. Not a bad daily take home!

A 2% arb on the QQQQ's doesn't exist. Period.
 
A question for any folks here who have insight in the arb industry:

I was quite suprised to see the 150tick spike down in YM on 23-June and AGAIN the next day. (See chart below). Other contracts were all well-behaved, the problem was only in YM.

I would think that arbs (ES/YM, YM/DIA etc) would have kicked in and prevented this fiasco. And yet, it happened again on the very next day!

I think it must have been the largest deviation from fair value during RTH since I've watched the contract.

ym-spikes.png
 
assuming the NQ is relatively well arbed against the nasdaq 100 cash, you'd only need to arb the QQQQ against the NQ to pocket the difference. and i agree with other posters, that in this case you think that $100 note on the floor must be a fake, it is..
 
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