Risk Free Arbitrage with Spread Betting

This is a very interesting system, to say the least.

Hello,
I didn't find any spread betting company who doesn't charge rollover... This method can't work in that case.

Has any of you found a rollover free spread betting site?

thanks

Peter, on the short retail FX portion what do you think of opening both a long and short position and then dropping the unprofitable leg when either the long or short hits a stop. this could limit the loss if the short side loses..?
there are many fx brokers now that support hedging in the same account. but i guess it could be dangerous because price action could turn around and your spread trade would be uncovered

you dont need one

You could do that, but that brings additional risk into the equation. The idea of the strategy was to be risk free, and in theory it is.

Interestingly, IG Index won't allow american citizens to open accounts with them...it appears others do though. anyone know why this is? I would rather open one with them but can't because of this. could it be that they don't want trouble from "tax evading" americans that could attract attention from the IRS? I wonder if an american using a bank account, FX broker and spread better in GB would be subject to gains taxes? at least as far as the SB side is concerned, it is not considered a futures contract correct

There must be a loser in this game. Who would it be? SB or fx broker? Got a feeling SB would lose money to this strategy.

seems to me it would be considered a type of "operational arbitrage" because it almost has more to do with shuffling money and deciding pip values than it does anticipating the market. granted a basically even distribution of profitable trades between long and short should be enough not to raise any red flags.
i know from experience that consistently losing on a retail fx account will attracted unwanted attention otherwise, you are just another trader as far as they know. how is anyone losing? there are many types of arbitrage in different markets, but with large brokers and modern networks they are harder to take advantage of for retailers

http://en.wikipedia.org/wiki/Arbitrage

an example is when the S&P 500 futures are going down, but the underlying stock index is still going up. there is a theoretical arbitrage that large brokers can catch by exploiting temporary imbalances for a guaranteed profit. if you have ever watched how closely the index reacts to the futures, you know how shortly the imbalances last.

Peter, thank-you for sharing this neat system.

Question: If you made the most of the leverage available with your broker/ SB, could you acheive the same results with smaller moves?
Will increasing the position sizes in your example say tenfold allow you to make the similair profits from 1/10 of the move in the currency pair (150 pips instead of 1500 in your example)?

ie as this is risk free, make the most of leverage, as long as you have enough margin to withstand a 150 pip move?

Is there anyway to get a Demo Account at City Index?
Can anyone confirm my thoughts?
According to the initial post we trade 1 Lot on each broker and take a 150 Pip loss. So 2000$ on each account should be enough if we get 150 Pips DD we are left with 500$. We gain 608GBP on the whole Arbitrage wich is around 1200$. Our initial account was 2x2000$=4000$ + 1200$=5200$. Which gives us a 30%ROI from the Arbitrage?

Why you don't need one? If everyday you are going to pay more on the short trade than you earn on the long trade.

If you let both trade open let's assume 3 month, you could end up paying 100$ rollover fees, and your spread arbitrage won't even cover it.

Am I wrong? If yes, please explain. Thanks

See post #37

As I understand it example one uses a 1500 pip move

I modeled this system quite carefully in Excel and showed that it works, but only when the price moves by 400-500 points end even then you don't make much money for the risk you're actually taking.*

There is a risk that you won't get both halves of the trade in place at an attractive enough rate. One may slip, or fail to place, especially if the market is active. You also need to hold quite a large position, possibly for a while and there's ar isk that one party may freeze your account or close out the trade, leaving you with an unclosed part. If this happens when the market moves dramatically, you could find yourself a hundred thousand down, all to chase a few thousand of profit. Finally, the company you're dealing with may go bust, which is hardly fanciful in today's climate.

So let's look at the numbers.

You will typically get 3 pips of spread for GBP/USD (Note that GBP/JPY has a bigger spread and it's no more profitable). So, for a £10/pip bet, you start off £30 in the hole. Of course, you could gamble by delaying placing both halves until the rates match, or placing two limit orders, but this doesn't affact the arbitrage. You're simply taking a position in the market, which might go against you. Likewise, as one poster suggested, if you exit one leg early, this is effectively identical with terminating both legs and then immediately placing a new leg in the chosen direction, so it doesn't actually change the profitability.

The BBS won't let me post the Excel data nicely, but here's a summary.

Start with GBP/USD at 1.7869/1.7871 (i.e. 2 point spread). Place a £10 spread bet and sell the £178,710 of currency. Now model 5, 10, 100 tick movements and their negative counterparts and work out the net P&L.

+5 -£40
+10 -£40
+100 -£34
+200 -£18
+300 £10
+500 £97
+1000 £491
+1500 £1,123

-1500 £1,333
-1000 £552
-500 £103
-300 £11
-200 -£18
-100 -£34
-10 -£40
-5 -£40


As you can see, you'll lose money most of the time. I looked at historical data and found very few days where you'd make money, even when you went to 3 day intervals and traded optimally (getting the high and low prices).

You also have to factor in the costs of holding the position. If the SB company chages a roll-over of half the spread, that eats into your profits too at £10 per night for a £10 bet and a two pip spread. So, if it takes a week to get that 500 point movement, you've still lost money.

I'm not sure it's worth trading unless you can get a free roll-over on the SB side, or cover that cost from the short sale interest. When I looked recently, holding a short GBP/USD position would actually cost you, because of the way that brokers calculate the charges due, but it may vary by broker.

This makes it rather situational and restricts it to a limited set of brokers and SB companies, any of whom might spot the arbitrage and close out your position with them, leaving you with a potentially large unhedged position. Given how long you might have to wait for the required movement, you also have to factor in the opportunity cost of tying up risk capital this way.

However, I'm open to persuasion that this is still a worthwile approach.

Regards
FoF.




* Before you tell me that it's arbitrage and therefore risk-free, let me say that I know a little about the subject, having worked for investment banks in pricing and risk. Of course, it's always possible that I've made a mistake in my calculations.

i think we should demo this strategy before coming to conclusion. The author is making money and he is nice enough to post it here. So maybe we can get "our hands dirty".

No,
As I stated at the the start of the thread Mr P is not the original author, credit where it is due if this is indeed the guy but i'll say again the original article was written by Roby Burns years ago a very talented share trader who I have a lot of admiration for. Here is the link to a system that the guy doesn't use anymore.

Because...... well what do you think?

http://www.financial-spread-betting....adbetting.html

i am thankful that he posted it here. If you that this article before he did why didn't you post it before him with proper credits. credit to whoever the author is but thanks for peter for poating it here

So you would prefer anecdote to analysis? The market makers must love you. How many trials would be enough to convince? The fact that the OP made money (13%) is hardly surprising given the recent turmoil in FX markets. The GBP/USD rate did move from $2 to $1.75, which is a massive 2500 point shift, but it doesn't happen very often.

Anyway, I also tested the strategy using two live demo accounts. It lost money, as predicted by my analysis. I also experienced slippage and failure to place/close out the trades simultaneously. Now I think I could solve that to a certain extent with software, since I could easily place the FX leg using the API to various brokers. However, no SB company has an API as far as I know. So you have to manually place one leg and then hit the auto-trade for the other. It's not too bad if the market is quiet, but if it is, then you probably aren't going to make any money either.

Note that placing lots of sequential trades performs worse than placing one trade and letting it ride to the end of a trend. The gains only accumulate as the two currencies diverge from their starting position, so the gains from 300 points to 400 are much better than from 0 to 100. That poses the question of when to close out the trades.

funny how my old threads keep coming back to life recently. I still use this strategy. Not sure I want to even try to convince anyone to use it. I shared it for free.

I use it on cable mostly. I had a long and short from $2 and held it all the way down to 1.8. I've made about 29% on quite a balance in total over the last year with various spread bet hedging trades.

I also have a swap free account for the short so I make some on the interest too.

I make other trades on that account so the broker is happy.

I open both sides when the market is quiet.. slippage for me has always been minimal. It's best if u can close the positions when its quiet too. Obviously this isnt always possible. Just make sure you dont open or close them during the NFP. Just use common sense.

also, that financial spread betting site stole my content. Not that i'm bothered, i was happy to share it.