Stock/Bond Arbitrage - Marty (Buzzy) Swartz Style

E

etfarb

Recently just finished reading hedge fund wizards and an interesting character (Larry Benedict) struck a bell. The guy is a discretionary Mean Reversion trader but his bread and butter is the S&P. His model is basically to arb the S&P in accordance to bond prices, in real time. Almost like relative value day trading. He was under Marty Swartz wing back in the day when he first started and Marty also discovered this price discrepancy back in the day (claims to be the first person to do it).

I'm really interested in this style of trading since it actually makes sense in the short term rather than TA.

I was wondering if anyone trades like this currently. How could you essentially determine a price on the spot for fair value between bonds and stocks and then determine to run an arb? Maybe this guy might be off his rocker and flying in and out of trades but I was wondering if anyone does this currently and if they have any tips/resources that I could look at.

My impression is that its really hard to do with the advent of HFT but maybe i'm wrong. Regardless, I'd love to hear back!

etfarb
 
One example of Benedict’s trading style using Bonds and S&P 500 explained by Benedict: “The bonds are at 20 bid and the S&P is bid $.75 higher. That move is equal to about 3/32 in the bonds, given that my bond position is about one-third the size of my S&P position. I could have take profits on the S&P, put a stop in three ticks higher. The worst I would do is break even approximately, and if the bonds move up three ticks, I’ll make money on both sides. It is that simple. I do a lot of these trades every day. Sometimes my positions are big; sometimes they are small. Whether they are big or small depends primarily on how I am doing for the month and what our P&L is for the year to date.”

Benedict knows his strategy is ever changing. One year, the Chinese market leads the rest of the markets and then the Euro does, etc… With correlations constantly changing, it’s a good thing he has strict rules on his losses.
 
Quote from Chuck Krug:

A lot of futures traders in the London Arcades trade arbitrage strategies.
More...

A lot of futures traders in any Arcades are gamblers from my experience.

Do you trade an arb strategy like this Chuck?
 
Pretty much everyone trades this spread, be it deciding on 401k allocations or on a tick by tick basis. How you do it is up to you.:cool:
 
You must log in or register to reply here.
Back
Top