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Risk Free Arbitrage with Spread Betting

  • #1
  • First Post: Oct 14, 2007 3:50pm Oct 14, 2007 3:50pm
ok here goes:

I noticed a while ago spread betting companies let you buy and sell currency pairs and many of them allow you to select which currency you want to use for each pip value. For example if you open a long GBP/USD pip values with normal brokers would be in USD. With many spread betting firms you can have pips in GBP.

Assuming I am fully understanding everything, This theoretically creates a "risk free" arbitrage opportunity.

Let me explain:

Say at this point in time, GBP/USD is $2.

If you sold 100k GBP/USD with a normal broker and buy GBP/USD with a spread betting company for £5 per pip, no matter which way the market moved, you would profit.

If price moves to 1.85 in the next few months, The short GBP/USD position with the normal broker would be +$15000. The long spread betting position would be £-7500.

If we look at both position in Pound terms we have this:

GBP/USD long £-7500
GBP/USD short $15000/1.85 (the rate at the time) = +£8108

This would result in a profit of £608.



Now lets see what happens if price moved to 2.15 instead:

The long would be +£7500
The short would be -$15000

Lets convert both positions into Pounds:

We have +£7500 and -$15000/2.15=£6976

This would result in a profit of £524


So as you can see, no matter what price does, you win. These calculations do not factor in the spreads etc. I dont believe any FX strategy is 100% risk free, brokers slip orders especially during the news, brokers can even go bankrupt etc etc.

I have used this strategy for a few months on the GBP/JPY with some great results.

The further price moves from the starting point, the greater the profit. It was excellent in July when GBP/JPY dropped massively.
  • #2
  • Edited 7:17pm Oct 14, 2007 6:37pm | Edited 7:17pm
Hi Peter
Thanks for sharing this great system.

I think You must have all this elements to make it work well

1-You must have a reputable forex broker allowing gbp Account to make it interesting. (Oanda)
2-trustful spread betting brokers with gbp account.
3-bank accont in Gbp


This will help to reduce transfert fee
Otherwise you will pay hight exchange fee.
Deposit and withdrawal must be fast with no or low fee.

I have some question about spread betting

Is available only for UK resident ???

What is the highest leverage offert in forex spread betting?
How interest is calculate in spread betting???

Hey Peter, Do you have to pay interest for your gbp/jpy trade.
  • #3
  • Oct 14, 2007 7:16pm Oct 14, 2007 7:16pm
This will not work because spreadbetting companies use business practices which at least must be considered as ethically questionable

I can put it this way: they do everything a forex retail bucket shop would do plus at the same time you will be paying a very high spread

You can try IG Index , they are really classic , this is something like FXCM on the other side of the pond , he , he
  • #4
  • Oct 14, 2007 8:02pm Oct 14, 2007 8:02pm
Quoting gambler997
Hi Peter
Thanks for sharing this great system.

I think You must have all this elements to make it work well

1-You must have a reputable forex broker allowing gbp Account to make it interesting. (Oanda)
2-trustful spread betting brokers with gbp account.
3-bank accont in Gbp


This will help to reduce transfert fee
Otherwise you will pay hight exchange fee.
Deposit and withdrawal must be fast with no or low fee.

I have some question about spread betting

Is available only for UK resident ???

What is the highest leverage offert in forex spread betting?
How interest is calculate in spread betting???

Hey Peter, Do you have to pay interest for your gbp/jpy trade.
yep to these 3 points. It's not restricted to UK only. I have a friend in Singapore who has tried the strategy.
  • #5
  • Oct 14, 2007 8:05pm Oct 14, 2007 8:05pm
Quoting fx_amateur
This will not work because spreadbetting companies use business practices which at least must be considered as ethically questionable

I can put it this way: they do everything a forex retail bucket shop would do plus at the same time you will be paying a very high spread

You can try IG Index , they are really classic , this is something like FXCM on the other side of the pond , he , he
Thanks for your comments.. You hit the nail on the head.. spread betting firms aim to empty your account into theirs as quick as possible. However, the strategy does work, It doesn't really matter to you if the spread bet side wins or loses as the other side covers it. Regarding the spread, The spread bet firm I use isn't too bad.. 4 pips for GBP/USD and 10 pips for GBP/JPY. The swap they pay is actually better than most retail brokers, too.
  • #6
  • Oct 14, 2007 8:34pm Oct 14, 2007 8:34pm
yes but yet I do not understand how this difference in currency conversion is possible , can you clarify this?

what firm do you use actually?

andrew
  • #7
  • Oct 15, 2007 6:04am Oct 15, 2007 6:04am
Quoting fx_amateur
yes but yet I do not understand how this difference in currency conversion is possible , can you clarify this?
andrew
Are you asking how they let you use pounds instead of dollars for pip values for a GBP/USD position? If so, they are basically a bookmaker, so they only earn on your losses.
  • #8
  • Oct 15, 2007 6:30am Oct 15, 2007 6:30am
Peter are you actually doing this? What is your annual rate of return w/ GBPJPY?

Thanks.
  • #9
  • Oct 15, 2007 6:52am Oct 15, 2007 6:52am
Hello PeterM, the spread betting firm I use has rolling currency bets but they charge a rollover fee each night, it works out at half the spread... the spreads are not bad at all 3 pip gbpusd 3 pip eurjpy etc.

To get a 1500 pip move takes a long time (many 1.5 x £5 's, might I say) Have you found a spread betting co. that allows rolling bets with no rollover charge/fee/spread ?
  • #10
  • Oct 15, 2007 7:42am Oct 15, 2007 7:42am
yeah.. cityindex dont charge to rollover
  • #11
  • Oct 15, 2007 7:43am Oct 15, 2007 7:43am
Quoting tdion
Peter are you actually doing this? What is your annual rate of return w/ GBPJPY?

Thanks.
Yes, I am doing this. Only for 6 months. I have made about 13% or so in that time on the arbitrage alone. I also use a swap free broker to cover the short side, so I earn the positive swap as well.
  • #12
  • Oct 15, 2007 7:53am Oct 15, 2007 7:53am
Thanks PeterM , I have an account with them, not used it for about 10yrs, I might look into this a bit more.
  • #13
  • Oct 15, 2007 9:29am Oct 15, 2007 9:29am
Quoting JackSpade
Thanks PeterM , I have an account with them, not used it for about 10yrs, I might look into this a bit more.
no problem, let us know how it goes
  • #14
  • Oct 15, 2007 1:46pm Oct 15, 2007 1:46pm
Quoting peterM
yeah.. cityindex dont charge to rollover
s that correct that they dont charge for rollover? if so just buy gbp/jpy with your broker and sell gbp/jpy with cityindex. Thats risk free isn't it?

Also who is your swap free broker. Do they usually close accounts down if they think it is been abused ie long term short gbp/jpy?

If you have all this covered, excellent, keep us informed
  • #15
  • Oct 15, 2007 7:06pm Oct 15, 2007 7:06pm
Quoting forexstacy
s that correct that they dont charge for rollover?
There is not "charge" as such. They do factor in the swap though.
Quote
if so just buy gbp/jpy with your broker and sell gbp/jpy with cityindex. Thats risk free isn't it?
No Cityindex is not a swap free broker.

Quote
Also who is your swap free broker. Do they usually close accounts down if they think it is been abused ie long term short gbp/jpy?

If you have all this covered, excellent, keep us informed
I've had a swap free account for over six months, no problems. I do other trades on it as well though.
  • #16
  • Oct 18, 2007 4:28pm Oct 18, 2007 4:28pm
Hi Peter,

Thanks for sharing this method, I think this is very interesting but I am struggling a bit to work it out.

Would you mind explaining in more detail what brokers you use (SB and normal), what currency you use for which account (e.g. on GBP/JPY, do you need a Yen forex account?), and whether you need to change the value per pip depending on the exchange rate at the time the trade is opened?

Also, do you have a set period you keep the trade open for, or do you have a TP?

Thanks
Jason
  • #17
  • Oct 18, 2007 11:02pm Oct 18, 2007 11:02pm
peterM,

i'm from Singapore, mind if you ask your Singapore friend if it's alright that i contact him via email to see how it can work out from this tiny prison island ?

like bank, broker, etc etc..........

many thanks.
  • #18
  • Oct 19, 2007 5:34am Oct 19, 2007 5:34am
Quoting aeu97137
Hi Peter,

Thanks for sharing this method, I think this is very interesting but I am struggling a bit to work it out.
n
no problem... I know it's a bit confusing at first. For a spread betting broker I use CityIndex. For the standard broker I use CMSFX.

Quote
what currency you use for which account (e.g. on GBP/JPY, do you need a Yen forex account?), and whether you need to change the value per pip depending on the exchange rate at the time the trade is opened?
It makes like easier if your standard broker account is in GBP, but its not essential. The spread bet side must be in GBP if you are hedging GBP/JPY.
Quote
and whether you need to change the value per pip depending on the exchange rate at the time the trade is opened?
pip values stay the same through the life of the trades.

Quote
Also, do you have a set period you keep the trade open for, or do you have a TP?
Yes, you need to set a stop and TP and rebalance both sides when your stop and TP get hit on each side.
  • #19
  • Oct 19, 2007 11:50am Oct 19, 2007 11:50am
Thanks Peter - i think i'm still missing something here though because i cant get the maths to stack up

Say GBPUSD price is 2.1000. SB acc short £5 per pip, Forex acc long $10 per
pip.

Price moves to 1.9500. SB account = +£7500 (1500 x 5), Forex account = -$15000 (1500 x 10). -$15000/1.9500 = -$7692. Loss of £192
Price moves to 2.2500. SB account = -£7500, forex account = +$15000 =
+£6666. Loss of £834

I also have a few other questions:
1. When using a GBP based account to place $/pip trades, are these converted
back to £ at the standard spread on the account?

2. Can this method be used for any GBP demoninated pair? (GBPCHF for example)

3. What is your target no. of pips / how long will you keep the trades open for?

Sorry for asking so many questions but keen to understand the workings of this - epecially if it has been working for you!

Thanks
Jason
  • #20
  • Oct 19, 2007 4:34pm Oct 19, 2007 4:34pm
Quoting aeu97137
Thanks Peter - i think i'm still missing something here though because i cant get the maths to stack up

Say GBPUSD price is 2.1000. SB acc short £5 per pip, Forex acc long $10 per
pip.

Price moves to 1.9500. SB account = +£7500 (1500 x 5), Forex account = -$15000 (1500 x 10). -$15000/1.9500 = -$7692. Loss of £192
Price moves to 2.2500. SB account = -£7500, forex account = +$15000 =
+£6666. Loss of £834
I should have made this clear before, the Spread bet side must be the long position. If it's the short position it will have the opposite effect, i.e. both sides will lose. Also, play around with the spread bet price per pip, so you get the best result.
Quote
I also have a few other questions:
1. When using a GBP based account to place $/pip trades, are these converted
back to £ at the standard spread on the account?
Yes, they are converted at the rate at the time of closing the position

Quote
2. Can this method be used for any GBP demoninated pair? (GBPCHF for example)
Yes, It will work as long as the spread bet side is long.

Quote
[3. What is your target no. of pips / how long will you keep the trades open for?
I try and keep the positions open as long as possible, then rebalance both sides. If I have spare cash lying around I sometimes add funds to keep the positions open whilst rebalancing. Credit cards can be good for this, as they often give you a few weeks interest free and it in theory completely risk free.

Quote
Sorry for asking so many questions but keen to understand the workings of this - epecially if it has been working for you!

Thanks
Jason
no problem, let us know how you get on..
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