THE ARBITRAGE AND SPREAD TRADING THREAD

Quote from MACD_addy:

How would one go about buying a stock on one exchange and immediately selling on another. For instance, there are several stocks listed on the Canadian TSE that are also listed on Nasdaq or NYSE. I have observed many instances where because of currency rates an interlisted stock is mis-priced in one market relative the other.

So how would I go about buying it on say the TSE using $CDN and then immediately selling it on the Nasdaq for $US and taking advantage of currency rates? Can this be done? Is the stock bought in one market fungible in another? Would this require a special clearing arrangement? Any info is greatly appreciated.

MACD
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MACD_addy,

SET-UP

1) TSE quoted stock $CDN:
BIDtse($cdn) ASKtse($cdn)

2) TSE quoted stock $US:
BIDtse($us) ASKtse($us)
[ 2) obtained by writing a link into Excel and applying a streaming $cdn:$us exchange rate... ]

3) NYSE American Depositary Receipt (ADR) $US quotation:
BIDadr($us) ASKadr($us)

If mod[BIDtse($us), ASKtse($US)] < > mod[BIDadr($us), ASKadr($us)], where 'mod' is the spread modulus, then there may be scope for profitable arbitrage...

Only play this game on relatively liquid stocks... execution issues on either or both of the legs is the BIGGEST risk to this strategy... precise execution on the less liquid ADR leg is the most frequent cause of difficulty... exchange rate risk is not a significant risk, if your trades are closed out by the end of the day (so there is no practical need to add a further layer of costs by hedging out the exchange rate risk)...

Ensure that the arbitrage opportunity > 3 x commissions... can write an additional piece of code in Excel VBA and translate that to a real time commission-inclusive arbitrage channel line graph... this yardstick keeps you in the game (what's left of it anyway... ROFL! :))... the big boys have muscled in on this game, and the scope in this game is not as great as it used to be i.e. international pricing has gotten much more efficient...

To quote rharp from a previous post:
"arbing has a limited reward
the more who do it.........the smaller the window.
So I doubt you'll see anything of value here for the thread. What incentive does anyone have of making the window smaller?"

My incentive in giving you this basic method is that I fully agree with rtharp... I have found the scope for the above strategy has shrunk bigtime... given that this is not my bread and butter strategy, I don't particularly care if more people play this specific game...

Hope this helps,
Candle
 
Let's keep this discussion rolling... I fully appreciate that people may not wish to discuss their arbitrage strategies in detail so on the arbitrage side of things, let's keep things general...

But let's also get into some detail on spread trading, for those of you who are into that...
 
Thanks for the post. I understand the theory behind the arb. What I am most interested in is the actual mechanics of doing it. For instance;

I am in a situation where I have extremely aggressive commissions and hence the execution costs are not a major hurdle.

How would I actually execute the trade? Could shares that I bought on the TSE be then immediately sold on the Nasdaq? I would assume that it would have to be done in the same account in order for the logistics of settlement to work. I just don't know how this would all happen and how complicated it would be from a "back office" perspective. Would those costs be prohibitive?

The problem I can see with it is that I would need to have two separate accounts (each denominated in the appropriate currency) and have the shares moved between the 2 accounts based on the transaction. I could see this being cumbersome and expensive because of the involvement of the clearing broker.

Am I even close here, or am I way off base?
 
Quote from MACD_addy:

The problem I can see with it is that I would need to have two separate accounts (each denominated in the appropriate currency) and have the shares moved between the 2 accounts based on the transaction. I could see this being cumbersome and expensive because of the involvement of the clearing broker.

Am I even close here, or am I way off base?
More...

I don't think you have to move shares between the two accounts. Just close this position for a profit when the spread moves back towards its normal range.
 
Quote from MACD_addy:

Thanks for the post. I understand the theory behind the arb. What I am most interested in is the actual mechanics of doing it. For instance;

I am in a situation where I have extremely aggressive commissions and hence the execution costs are not a major hurdle.

How would I actually execute the trade? Could shares that I bought on the TSE be then immediately sold on the Nasdaq? I would assume that it would have to be done in the same account in order for the logistics of settlement to work. I just don't know how this would all happen and how complicated it would be from a "back office" perspective. Would those costs be prohibitive?

The problem I can see with it is that I would need to have two separate accounts (each denominated in the appropriate currency) and have the shares moved between the 2 accounts based on the transaction. I could see this being cumbersome and expensive because of the involvement of the clearing broker.

Am I even close here, or am I way off base?
More...

When you spot a suitable arbitrage opportunity, open one position on the Canadian TSE stock and open a directionally opposing equivalent position on the US American Depositary Receipt (ADR)... as the inter-exchange spread discrepancy converges to parity you simply reverse both positions, thereby locking in your arbitrage... in total, you have 2 round-trip commissions, one on the Canadian exchange and one on the US ADR...
 
Quote from MrDinky:



Yeah, I can only bang em for about a year myself then it's on to the next one. I'll keep an eye on em so I'll have something to bang on just in case there's nothing else around.

What were we talking about again?

:cool:
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If they'd just spread a little wider, then I'd bang 'em again in a New York minute. :cool:
 
I like the S&P 500 and Dow spread using the futures conracts ES and YM. Their not quite one to one but their relationship is tradeable. It is an interexchange pair trade.

Are there any others that trade this spread ?
 
Quote from spreadem:

I like the S&P 500 and Dow spread using the futures conracts ES and YM. Their not quite one to one but their relationship is tradeable. It is an interexchange pair trade.

Are there any others that trade this spread ?
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I used to trade SPY/DIA, but found that the spread trended more than I was expecting and DIA didn't have great liquidity.
 
I find that the ym side of the spread is most liquid during fast market conditions, thus giving a better chance to get the spread price desired.
 
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