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Risk Free Arbitrage with Spread Betting

  • #21
  • Oct 20, 2007 6:52am Oct 20, 2007 6:52am
Hmm, am I getting something wrong here? How should this strategy work? You would have to receive the same price for both your long and short position in order the get the 7500/15000 calculation.

Example for GBP/JPY:

BID 240,00 / ASK 240,10

You go long at your spread betting firm at 240,10 and short at your normal FX broker at 240,00. This is a difference of 10 pips. Now you would just have to be a prophet to know that your short trade will trade up to 240,10 so that you get the same price like on your long trade and you will have to be one because when you close both trades you will always get a loss of exactly those 10 pips which makes the whole theory obsolete. Perhaps one might say: "oh come on, this pair has so much volatility, of couse it wents to 240,10", but, as I assume, thatīs not the core of the theory. Itīs about executing both orders simultaneously and this always produces 10 pips losses or 5 pips or whatever losses in GBP/USD.

But perhaps I am just getting something wrong.

regards
  • #22
  • Oct 20, 2007 2:38pm Oct 20, 2007 2:38pm
Quote
You go long at your spread betting firm at 240,10 and short at your normal FX broker at 240,00. This is a difference of 10 pips. Now you would just have to be a prophet to know that your short trade will trade up to 240,10 so that you get the same price like on your long trade and you will have to be one because when you close both trades you will always get a loss of exactly those 10 pips which makes the whole theory obsolete.
Ok, you are partly correct and partly incorrect. Let's use your example. Say price is at 240 for gbp/jpy.

I have a spreadsheet that works out the calculations and it seems 4.15 GBP per point is the best price for the long spread bet position. We use 1 full 100k lot for the short.

Let me explain why your logic is incorrect for this strategy.

If price moves to 220. The long position will be -2000 pip. so thats -2000*4.15GBP=-8300GBP

The short will be price in yens. 1 pip will equal 1000 yen. The position will be +2000 pips. So -2000*1000 yen = 2 million yen

When we close then short, the yens get converted back to sterling at the current rate. So it will be +2 million yen/220 which is +9090GBP.

so the risk free profitr would be 9090-8300 = 790 GBP

OK, say price went to 260. The long would be +2000 * 4.15 = +8300
The short would be -2million yens. When the -2million yens are converted back to sterling, we use the current rate, which would be 260. -2million/260= 7692 GBP.

so the risk free profit would be 8300-7692 = 608 GBP

So it doesn't matter which way price moves, you win. Note, these figures do not account for the spread and other costs. The more price moves, the bigger the arbitrage opportunity becomes.

I know it's a little confusing at first, it took me a while to get my head round it.
  • #23
  • Oct 21, 2007 6:15am Oct 21, 2007 6:15am
peter,

so to make this method work.....


1) must have sizeable a/cs at both broker and spreadbet company to avoid margin call by either side

2) must trade longer term to get the best results so must make sure a/c at either side can survive

3) can we close out position quick enough at spreadbet company compared to the broker so price movement would reduce profit too much ?
  • #24
  • Edited 1:37pm Oct 21, 2007 9:24am | Edited 1:37pm
Peter,

I didnīt know itīs possible to chose the outcome per pip in increments. In this case it sounds like this strategy really delivers constant money. In fact, I havenīt grappled with spread betting so far.


Quoting findcount
peter,

so to make this method work.....

2) must trade longer term to get the best results so must make sure a/c at either side can survive
Is it possible to trade intraday with spread betting firms or is it like betting with options where you have to chose a point of time in future which would make intraday arbitrage trades impossible? If intraday is possible Iīd say one could make 2-3 trades a day and compound the hell out of your profits since there would not be a single loss ever.

Of course, the disadvantage is that you have to transfer money very often. Isnīt there a company which offers regular forex trading and spread betting in addition so that one can transfer from one account to another within the broker? I found CMC Markets. They offer normal FX trading an "financial spread betting". Is this the same like CFDs? If so, you canīt spread bet on currencies with them. It works just with indices, stocks, futures and so on.
  • #25
  • Oct 21, 2007 1:50pm Oct 21, 2007 1:50pm
Peter, Iīm still a confused...

1) Should the account at the FX broker be running in pounds as well?
2) You said you use CMSFX as a swap free broker, so you can collect the positive swap as well, but if you short GBP/JPY you have to pay interest...
3) You said entering at 240, but if you short at 240 with CMSFX you wonīt get 240 at the same time when you go long with CityIndex but you have to pay 240,10. So how can you come over this permant spread loss of 10 pips difference? By adapting the pound/pip value at CityIndex?

Thank you!
  • #26
  • Oct 21, 2007 5:14pm Oct 21, 2007 5:14pm
Quoting dasorr
Peter,

I didnīt know itīs possible to chose the outcome per pip in increments. In this case it sounds like this strategy really delivers constant money. In fact, I havenīt grappled with spread betting so far.
Yes, you can with spread betting

Quote
Is it possible to trade intraday with spread betting firms or is it like betting with options where you have to chose a point of time in future which would make intraday arbitrage trades impossible? If intraday is possible Iīd say one could make 2-3 trades a day and compound the hell out of your profits since there would not be a single loss ever.
You can trade intraday with spread betting.
Quote
Of course, the disadvantage is that you have to transfer money very often. Isnīt there a company which offers regular forex trading and spread betting in addition so that one can transfer from one account to another within the broker? I found CMC Markets. They offer normal FX trading an "financial spread betting". Is this the same like CFDs? If so, you canīt spread bet on currencies with them. It works just with indices, stocks, futures and so on.
I think so, I have never looked into it. CFDs are not the same as spread betting.
  • #27
  • Oct 21, 2007 5:18pm Oct 21, 2007 5:18pm
Quoting findcount
peter,

so to make this method work.....


1) must have sizeable a/cs at both broker and spreadbet company to avoid margin call by either side
Well, a bigger account would allow you to use bigger position sizes, so profits would be higher.
Quote
2) must trade longer term to get the best results so must make sure a/c at either side can survive
Bigger movements would yield bigger results, yes.
Quote
3) can we close out position quick enough at spreadbet company compared to the broker so price movement would reduce profit too much ?
As long as you dont try and close in the middle of the nfp, I don't think it would be a problem.
  • #28
  • Oct 21, 2007 5:35pm Oct 21, 2007 5:35pm
Quoting dasorr
Peter, Iīm still a confused...

1) Should the account at the FX broker be running in pounds as well?
It's best to have both accounts in pounds. If you trade GBP/JPY, your pips will be in yens with the standard FX broker and be converting into pounds.
Quote
2) You said you use CMSFX as a swap free broker, so you can collect the positive swap as well, but if you short GBP/JPY you have to pay interest...
Long spread bet, you earn interest. Short with swapfree broker, no interest to pay.
Quote
3) You said entering at 240, but if you short at 240 with CMSFX you wonīt get 240 at the same time when you go long with CityIndex but you have to pay 240,10. So how can you come over this permant spread loss of 10 pips difference? By adapting the pound/pip value at CityIndex?

Thank you!
yep, you just answered the question yourself.
  • #29
  • Oct 21, 2007 5:36pm Oct 21, 2007 5:36pm
Quoting dasorr
Peter, Iīm still a confused...

1) Should the account at the FX broker be running in pounds as well?
It's best to have both accounts in pounds. If you trade GBP/JPY, your pips will be in yens with the standard FX broker and be converting into pounds.
Quote
2) You said you use CMSFX as a swap free broker, so you can collect the positive swap as well, but if you short GBP/JPY you have to pay interest...
Long spread bet, you earn interest. Short with swapfree broker, no interest to pay. The swapfree broker is not necessary for the strategy, just a nice bonus if u can find one.
Quote
3) You said entering at 240, but if you short at 240 with CMSFX you wonīt get 240 at the same time when you go long with CityIndex but you have to pay 240,10. So how can you come over this permant spread loss of 10 pips difference? By adapting the pound/pip value at CityIndex?

Thank you!
yep, you just answered the question yourself.
  • #30
  • Oct 22, 2007 7:02am Oct 22, 2007 7:02am
Quoting dasorr
Peter,

I didnīt know itīs possible to chose the outcome per pip in increments.

.

very sorry.....but what does this statement mean ?

choose outcome per pip in increment ?
  • #31
  • Oct 22, 2007 9:03am Oct 22, 2007 9:03am
Quoting findcount
very sorry.....but what does this statement mean ?

choose outcome per pip in increment ?
Itīs the same like saying "GBP 5 per point" regarding the spread betting side. You can choose how much your result per pip (or point) should be when the position ends up in a loss or a win.
  • #32
  • Oct 22, 2007 9:18am Oct 22, 2007 9:18am
Peter,

I got another question: I suppose you have to set the GBP/point value everytime you place the trades. You canīt always set the number at 5 or 4, right?

For example:

As Iīm writing this, GBP/JPY rate is 231,85 -> in GBP the pip value at CMSFX is 4,31. So I have to place a bet for 4,31 GBP per point, am I right here? I found out about the figure of 4,31 as I am using a demo of CMSFX where they include a pip value calculator.

I have monitored price a bit and found that pip value (in GBP) was

- 4,32 GBP at 231,63 and
- 4,31 GBP at 231,85

so I suppose that it was around 4,15 at 240, right?

Is this the variable you are calculating with your spreadsheet when you said GBP 4,15 would be the best price for the long spread bet at 240? If not, how did you come up with 4,15 for 240?

So in fact, one makes profits because the pip value (of e.g. 4,15 GBP) remains always the same during the trade at your spread betting broker and at the normal FX broker the pip value of course changes in time when price, of course, changes too, right?
  • #33
  • Oct 22, 2007 12:46pm Oct 22, 2007 12:46pm
Quoting dasorr
Peter,

I got another question: I suppose you have to set the GBP/point value everytime you place the trades. You canīt always set the number at 5 or 4, right?

For example:

As Iīm writing this, GBP/JPY rate is 231,85 -> in GBP the pip value at CMSFX is 4,31. So I have to place a bet for 4,31 GBP per point, am I right here? I found out about the figure of 4,31 as I am using a demo of CMSFX where they include a pip value calculator.

I have monitored price a bit and found that pip value (in GBP) was

- 4,32 GBP at 231,63 and
- 4,31 GBP at 231,85

so I suppose that it was around 4,15 at 240, right?

Is this the variable you are calculating with your spreadsheet when you said GBP 4,15 would be the best price for the long spread bet at 240? If not, how did you come up with 4,15 for 240?

So in fact, one makes profits because the pip value (of e.g. 4,15 GBP) remains always the same during the trade at your spread betting broker and at the normal FX broker the pip value of course changes in time when price, of course, changes too, right?
hi dassor

i too have a demo at cmsfx, but cant locate the pip value calculator, could you be kind enough to explain where it is or how to use it.

thanks monty2
  • #34
  • Oct 22, 2007 2:52pm Oct 22, 2007 2:52pm
monty,

go to the trading window (besides "options"), then "forex resources", then pip calculator.


and btw: I just found out that intraday trades are quite useless, since on the fx broker side price has to move at least 50 pips or so to break even with the spread betting side better late than never
  • #35
  • Oct 22, 2007 5:56pm Oct 22, 2007 5:56pm
Quoting dasorr
Peter,

I got another question: I suppose you have to set the GBP/point value everytime you place the trades. You canīt always set the number at 5 or 4, right?
That is correct.

Quote
so I suppose that it was around 4,15 at 240, right?
yep
Quote
Is this the variable you are calculating with your spreadsheet when you said GBP 4,15 would be the best price for the long spread bet at 240? If not, how did you come up with 4,15 for 240?
I'm pretty sure that would work. Infact, I hadn't thought of doing that, its a better way than what I do it. What I have done is made an excel spreadsheet to see which pip values work best.
[/quote]
Quote
So in fact, one makes profits because the pip value (of e.g. 4,15 GBP) remains always the same during the trade at your spread betting broker and at the normal FX broker the pip value of course changes in time when price, of course, changes too, right?

You get it now.
It's a bit confusing at first.
  • #36
  • Oct 22, 2007 7:50pm Oct 22, 2007 7:50pm
Nice find peterM.. and thanks for sharing the idea.

I am just trying the demo account at CityIndex and it doesn't appear to have the forex spread bets where you set the per pip value in there. Only a gbp/usd contract that expires on 12th December.

Do the live spread bets you describe have time limits on them like that too?

Have you calculated how much your live perfomance would have been affected if you had been paying swap on the short side?
  • #37
  • Oct 23, 2007 3:55am Oct 23, 2007 3:55am
Quoting IndyCash
Nice find peterM.. and thanks for sharing the idea.

I am just trying the demo account at CityIndex and it doesn't appear to have the forex spread bets where you set the per pip value in there. Only a gbp/usd contract that expires on 12th December.

Do the live spread bets you describe have time limits on them like that too?

Have you calculated how much your live perfomance would have been affected if you had been paying swap on the short side?
Thanks :-)

City index do both daily rolling contracts and the futures contracts you mention. If you are paying interest on both sides, the positive should more or less cancel out the negative, but look closely at broker swaps, they can vary a lot.
  • #38
  • Oct 23, 2007 6:20am Oct 23, 2007 6:20am
Hey peter

Thanks for sharing this little beauty. Great idea!! I love these "free money" strategies.

Just a question - how low are you able to set your pip value on the spread betting company. 41p?

I would like to try this strategy using a mini lot so as I don't require so much margin.

Cheers
  • #39
  • Oct 23, 2007 7:23am Oct 23, 2007 7:23am
It really is a sexy strategy. Thanks for this actually obvious brainwave, Peter

If you catch 1500 pips 12 times a year or 24 x ~750 (in GBP/JPY) and compound each time, you get 50-60% per year for doing nothing else than transfering your money, overnight holding profits included and including the time it takes to transfer money between accounts with an assumed duration of 6 trading days.
  • #40
  • Oct 23, 2007 8:08am Oct 23, 2007 8:08am
According to my calculations, when you add the spread, you need a sizeable move (>570 pips in GBP/USD) to profit from this strategy. I wouldn't expect that type of move, let alone 1500 pips, too often.
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