The right IB Order Type for arbitrage attempt

D

delta_1

Hi guys,

I am trying an arbitrage pairs trade. Long/short the stock and its ADR. Ironically the stock is less at it’s home exchange in Europe than the ADR in the US.

The ADR leg works fine but closing/opening the equivalent leg in the illiquid stock in Europe crushed me last time. The bid/ask stayed the same after entering a sell order at the bid yet my order wasn’t executed. I used simple limit orders. After roughly 30 sec the bid moved against me several times and I had to chase it until the profitability was gone.

Unfortunately lots of those beautiful IB order types are only meant for the US markets.

Which order type would you suggest for a pairs trade where the “difficult” leg is in Europe?

Are IBs Third Party Algos meant for US exchanges or worldwide?

“Jefferies Pairs - Risk Arb” sounds good – does anybody have experience with this one?


Thanks a bunch.
 
delta_1 said:
Hi guys,

I am trying an arbitrage pairs trade. Long/short the stock and its ADR. Ironically the stock is less at it’s home exchange in Europe than the ADR in the US.

The ADR leg works fine but closing/opening the equivalent leg in the illiquid stock in Europe crushed me last time. The bid/ask stayed the same after entering a sell order at the bid yet my order wasn’t executed. I used simple limit orders. After roughly 30 sec the bid moved against me several times and I had to chase it until the profitability was gone.

Unfortunately lots of those beautiful IB order types are only meant for the US markets.

Which order type would you suggest for a pairs trade where the “difficult” leg is in Europe?

Are IBs Third Party Algos meant for US exchanges or worldwide?

“Jefferies Pairs - Risk Arb” sounds good – does anybody have experience with this one?


Thanks a bunch.
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Some of those illiquid stocks are only traded in market maker kind of exchanges (Makler in Germany) such as Frankfurt FWB and Stuttgart SWB.
The bid/ask you see is only indicative and sometimes not up to date, they update the quote when a matching order is entered using ADR or similar prices from more liquid market place.

IBIS (XETRA) is different, all orders are real and executable, not indicative.

So my guess is there is no arbitrage possible, no matter what kind of order.
 
JackMorgan said:
nah, that would not help
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JackMorgan said:
Simple answer, if its possible to do the arb at all, is do the 'hard' side first .

Obvious , no ?
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ha, you’re suggesting the exact same thing, knucklehead. I’ve used that order type to manage that specific situation for tens of thousands of pairs trades. It works (although I suspect JamesJ is correct).
 
just a short feedback:

It didn't work because IB puts a trade cap on the stock. Buying and selling often occurs 1-2% away from the last price. I assume that is the reason. So you always have to call in and ask them to lift the cap.
Then the trade goes through.
Problem is by the time I finally reach them the price has moved...

Probably with a different broker I might have had a chance...

Regarding the order type:
IB told me the pair trade order type would be the appropiate one to use but in the case of different currencies it doesn't work. I wish they would mention such intrecacies in their user guide.

There was another learning experience: As the stock is quite illiquid I could litterly see the market maker move in the orderbook. Only part of my order was filled as a part of the liquidity instantly disappeared on the bid and ask side. A second later there were new orders in the order book with a lower bid and ask respectively - automatic adjustment by the mm. So one would have to estimate how much of the sitting orders are real and how many might suddenly disappear in front your eyes while executing a trade...
 
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