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Risk Free Arbitrage with Spread Betting

  • #81
  • Edited 4:05am Sep 19, 2008 3:46am | Edited 4:05am
Quoting peterM
Not sure I want to even try to convince anyone to use it. I shared it for free.
Don't get me wrong, I appreciate your sharing it. I'm not sure that I would have, especially if I were making money with it.

Quote
I also have a swap free account for the short so I make some on the interest too.
I'm puzzled by this. Most FX brokers will charge the difference between the interest rates for the two currencies. Let's take an example from the DBfx web site.

Long 1,000,000 EUR/USD @ 1.2967 = 1,296,700 USD


EUR interest rate = 3.50%


USD interest rate = 5.25%


3.50 – 5.25 = -1.75%


1,296,700* (-.0175) / 360 = -63.03 USD


The roll over of the trade will result in a charge of $63.03 or $6.30 for each lot.

This example is for a long trade, but if you were short, you'd receive that charge instead.

OK, now let's see what happens with a long GBP/USD position and interest rates from http://www.bba.org.uk/content/1/c6/01/44/97/Sep08.xls

1,000,000 GBP/USD @ 1.7800 = 1,780,000 USD
GBP interest rate = 5.04%
USD interest rate = 2.14%
5.04% - 2.14% = +2.9% (note: this is positive)
1,780,000 x 2.9% / 365 = 141.42 USD

Thus in a long position you would receive $141 per day, because US interest rates are higher than UK ones. However, in our case it is is a short position, so you'd pay that amount, rather than receive it. So I don't get how you make money. Unless, of course, you have a dumb FX broker who charges like they do for equity positions, with a variant of LIBOR-2.5%.

You use the phrase "swap-free", so do you mean using an Islamic-style account, where you pay a fixed commission, but don't pay/receive interest? I'm still confused, because then you don't receive anything on the short position either. Or do you mean that you then receive ordinary interest on the balance?
  • #82
  • Sep 21, 2008 2:05pm Sep 21, 2008 2:05pm
Further to the no-swap accounts, I found IBFX's method amusing.

https://secure.ibfx.com/Promotions/NoSwapAccount.aspx

"The no-swap accounts are offered to those that are unable to earn or pay interest due to religious reasons. These accounts will earn or pay a weekly fee based on the trades that remain open after the market closes on Friday The no-swap accounts are offered to those that are unable to earn or pay interest due to religious reasons. These accounts will earn or pay a weekly fee based on the trades that remain open after the market closes on Friday"

Of course I'm sure it's pure coincidence that the weekly fee is calculated per currency pair and just happens to closely resemble the daily swap rates.

Still, it looks like you can save the swap as long as you close the position on Friday just before the weekly fee is applied and then re-open it on Sunday.

"If an order is opened after the Sunday open and is closed before the Friday close, there is no debit or credit for fees."

Also beware of: "Interbank FX reserve the right to revoke the Interest Free Trading account option and/or change the commission fee structure at any time with or without notice. Commission charges may be charged retroactively at Interbank FX’s sole discretion"
  • #83
  • Sep 22, 2008 1:00am Sep 22, 2008 1:00am
Quoting peterM
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.
PeterM,

It appears the last post you made was your 1000th post. Congratulations!
Maybe one day I'll also make it to 1000.


Topgun
"Success is not a fantasy, it's a formula." - MTI
  • #84
  • Edited 6:49am Oct 7, 2008 5:52am | Edited 6:49am
Quoting peterM
ok here goes:
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.
It's totally virtual profit! If you live in UK - you earn, but if you live in USA and use dollars, you have to convert pounts into dollars and then your profits will disappear.

This is 50/50 game
  • #85
  • Oct 7, 2008 8:05am Oct 7, 2008 8:05am
Quoting m1000
It's totally virtual profit! If you live in UK - you earn, but if you live in USA and use dollars, you have to convert pounts into dollars and then your profits will disappear.

This is 50/50 game
The exchanging of dollars to pounds through the interbank is where your profits will dry up.

Also, that figure was based on a 15 cent move? That's 1500 pips. How long does that take?
  • #86
  • Edited 10:56pm Feb 3, 2009 10:56pm | Edited 10:56pm
Quoting peterM
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...
Hi, is the same buy eur/usd and sell eur/usd in one eur account and one usd account?
  • #87
  • Oct 21, 2009 9:12am Oct 21, 2009 9:12am
Hello Peter,
Thankyou for the strategy that you have posted. I prepared a file and my assumption is the broker(FXCM)has a spread of 7 pips for GBP/JPY and IG Index has a spread of 7 points for GBP/JPY.
The GBP/JPY at the moment is 148.36. Hence I short a standard lot of 100,000 at FXCM at 148.32 and also go long at IG Index at 14839. The best price per point is 6.74 as per my calculation. What I dont understand is in order to breakeven, the market should move atleast 470 pips eitherways. Please note that this excludes the rollover charges at both FXCM and IG Index which roughly works out to 10 GBP per day.
How realistic is it to make atleast 1000 GBP per month in this strategy ? In order to make 1000 GBP profit, the market should move atleast 1700 pips either ways.
In other words, what has been the monthly average movement of GBP/JPY ?
  • #88
  • Oct 22, 2009 1:27pm Oct 22, 2009 1:27pm
Quoting Topgun_1
PeterM,

It appears the last post you made was your 1000th post. Congratulations!
Maybe one day I'll also make it to 1000.


Topgun
It was over a year ago in which Peter made his 1000th post (it can be found 8 posts above this post). I then congratuated him for his accomplishment and... he has not made a post since then!

Obviously it doesn't matter whether someone continues to make posts or not, but I find it very odd that someone would get to a nice round number like "1000" and then never post again!

Was it just a coincidence that he made it to 1000 and hasn't posted since? Or did that 1000th post make him stop and reflect that he may have been spending too much time here at the forum? (Not that I think it, but maybe he might have thought so).

Then again, maybe it is just me that finds this odd....


Topgun
"Success is not a fantasy, it's a formula." - MTI
  • #89
  • Oct 22, 2009 1:35pm Oct 22, 2009 1:35pm
Quoting Topgun_1
It was over a year ago in which Peter made his 1000th post (it can be found 8 posts above this post). I then congratuated him for his accomplishment and... he has not made a post since then!

Obviously it doesn't matter whether someone continues to make posts or not, but I find it very odd that someone would get to a nice round number like "1000" and then never post again!

Was it just a coincidence that he made it to 1000 and hasn't posted since? Or did that 1000th post make him stop and reflect that he may have been spending too much time...
Well, he could be dead.
  • #90
  • Oct 22, 2009 2:47pm Oct 22, 2009 2:47pm
Maybe City Index found him, after all, In all the spread betting accounts I've opened, they always have a clause saying that you agree not to use it for hedging etc. Pretty sure this is why.
  • #91
  • Oct 22, 2009 2:47pm Oct 22, 2009 2:47pm
  •  Shan
  • | Joined Jan 2009 | Status: Work To Live, NOT Live To Work | 19 Posts
He knew too much!
  • #92
  • Feb 27, 2010 2:17pm Feb 27, 2010 2:17pm
Hallo PeterM,

Thanks for letting us know about this system,

Would you be so kind to upload your spreadsheet file to have a look at your price calc. formula to get the best price settings for this arbitrage strategy?

Thanks a lot.
  • #93
  • Jul 24, 2010 8:45am Jul 24, 2010 8:45am
Hey Peter,

Do you still use that strategy? How is it going? Are you still with the same broker and spread betting firm?
Also I would like to ask about spreads. How do you deal with them? Do you wait until profit covers them?

All the best
  • #94
  • Feb 2, 2015 9:16am Feb 2, 2015 9:16am
Quoting Siam
{quote} 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

Well, this thread has been dead for some time but this is what I think ...

I checked the supplied pointer to the 'origina articlel' and ... there is a clear "Credit to Peter Marsden" under the article's title!

Also the content of the article starts as a copy of the original post and then it supplies additional information that is clearly taken from PeterM's replies to subsequent questions. That should have been pretty obvious even if the credit line was missing at the time.

So all in all, Siam is wrong and PeterM is the author.

Thank you for listening.
  • #95
  • Sep 6, 2015 7:55am Sep 6, 2015 7:55am
Peter has told you only one half of the truth about the Arbitrage, which is no real Arbitrage. It is only a statistical arb, and combined with a lot of hurdles. With 3 following Posts I will show you the mathematical foundamentals of this trade, its minimum conditions and its problems to realize.

It will be a rational summary and extension of all the preceding Posts.
..............................................................................................................................r^2
As a teaser for today: your GROSS Profit potential of this trade is: ...............E(arb) = E(--------)
.............................................................................................................................1 + r
r .... percentage Change in X-rate
  • #96
  • Sep 21, 2015 10:28am Sep 21, 2015 10:28am
Quoting scooby-doo
{quote} Well, he could be dead.
That's optimistic
  • #97
  • Sep 28, 2016 7:48pm Sep 28, 2016 7:48pm
It took quite some time, till at least one serious interest was raised, which I have missed (sorry tradershads ;-)). So I will continue my explications (perhaps a bit shortened).
Above GROSS Profit formula can be reduced to E(r^2); in this way symmetrical profits are assummed for positive r and for negative r.

E(r^2) brings memories of the term: E(r^2) - E(r)^2

aka VARIANCE

we see, our gross Profit is a function of Variance, the Variance of the x-rate
to get a feeling for the gross profit potential of a "PETERbet" we can check the historcial variance/volatility or the implied variance/volatility of the x-rate.

for GBPUSD (without BREXIT!) annual Vola is at best 10%
this results in an annual gross profit of 10%^2; i.e. 10% of 10%, 1% or 100 basispoints

to get a net Profit number, we have to deduct costs (bid/ask, financing, other expenses (eg Money Transfer, etc.))

taking spot positions we have 2 bidaskspreads of about 4 basispoints, not much
but average brokers apply a Charge of +/- 0,75% p.a. (I know Brokers robbing up to 3,00% p.a.!!!) for calculating roll,
we have a Long AND a Short Position, so our total financing cost is 1,50%
or 150 basispoints

there goes the net profit ....


ok, let's be a bit more clever, we search, and we search, and we search,
finally we find two Brokers offering Forwards / Futures contracts

financing is no problem anymore, we are trading the term structure thru, either we buy a Forward above spot (negative term Basis) and sell a foward above spot (positive term Basis)
or we buy a Forward below spot (positive term Basis) and sell a Forward below spot (negative term Basis)
that sounds much too easy anyway, because do not Forget, you have to establish two MATCHING positions SYNCHRONOUSLY in two separate accounts!!!!

BUT; the bidaskspread for such a contract is of course much bigger, 10 basispoints are plausible, 2 positions make 20 basispoints,
duration of a Forward is usually 3 month, so we have to roll our position 4 times a year!

I will from now on concentrate on a mere 3 months position, cost: 20 basispoints
expected gross Profit: 25 basispoints

expected net Profit: 5 basispoints

but what is our yield???
it is defined by our upfront Investment and our net return.

Our upfront consits of the bidaskspread and the MARGINs we have to bring

a stupid calculation would therefore be: upfront: b/a broker1 10bp
margin b1 100bp
b/a broker 2 10bp
margin b2 100bp
---------------------------
total: 220bp
net Profit 5bp

yield p.q. 2,27% -----------> 9,09% p.a.

Looks good, but it is nonsense

our gross profit depends on the MOVEMENT of the x-rate, if it does not move, there is NO Profit only costs.
if it moves, one of our positions gets a positive p/l, but the other goes negative AND THAT effects a margin call

in order to get 25bp gross Profit, we need a move of 5%, i.e. one of our p/ls will go 500bp into the green, but the other will
be 475bp in the red.

even if we can transfer our margin Money between the two Brokers swiftly, smoothly and without cost, we will have to provide
additional margin funds between 0bp and 475bp.

taking the middle, 237bp; our up front has more than doubled and our yield was cut in half, and we have a lot of Liquidation risk left,
the lower the Liquidation (close out)risk the more funds we have to provide and the lower our yield.

And once again, either the currency does not move, then we have a guaranteed LOSS*, or it moves, than we have a lot of Clearing Troubles.

Nevertheless it can be feasible, but it is a lot of hard work, asks for lot of Clearing knowledge, and is NOT RISKLESS

British residents (only those are allowed to trade such contracts!) may feel free to contact me for more details, others I ask for their
understanding, that it is futile to discuss theoretical profit potentials.

happy trading



*except we have been clever enough to write some Options on the x-rate
  • #98
  • Oct 6, 2016 8:31pm Oct 6, 2016 8:31pm
POST SCRIPTUM

Consider your two accounts during BREXIT night and tonight (Oct 7), moving more than 6% in short and even shorter time.
No Chance at all to match margins in time, the losing account is closed out and than the currency bounces back. You end with a realized loss in one account, and a diminished Profit in the other.

Those faithful out there might answer; " ... but I have set my (clever) stops ...!" No further comment.

Market historians could check, whether the "sudden death" of PeterM was preceded by an X-Sigma Event in one of the major crosses.


PPS

It nevertheless is possible to generate excess Returns,
but in a risky way,
not all comparable to the naive Picture painted by Peter...
  • #99
  • Dec 13, 2016 3:10am Dec 13, 2016 3:10am
Quoting eztrader1
POST SCRIPTUM Consider your two accounts during BREXIT night and tonight (Oct 7), moving more than 6% in short and even shorter time. No Chance at all to match margins in time, the losing account is closed out and than the currency bounces back. You end with a realized loss in one account, and a diminished Profit in the other. Those faithful out there might answer; " ... but I have set my (clever) stops ...!" No further comment. Market historians could check, whether the "sudden death" of PeterM was preceded by an X-Sigma Event in one of the major...
Thank you for the insight, I checked this thread regularly to see any updates.. I looked into futures etc before but all you said was right. Its quite disappointing. Maybe there are other things exploitable spread betting like stocks? I'm from the uk, can we discuss further? I can't PM you.
  • #100
  • Dec 19, 2016 7:17pm Dec 19, 2016 7:17pm
Any Arbitrage or arbitrage like strategy is based on NON-Linear Price/Return- Relations, between the Basis Investment and its hedging Instrument. So if you look for Arbitrage opportunities, you have to look for non-linear Relations. Deterministic (better) or stochastic (not so good) Relations. for spread bets non-linearity lies in r/(1+r), and it is deterministic. Comparable to the convexity in Bond Prices, Gamma in Options or the pricing of the Dollar Index. Not so explicit and probably not deterministic is the relation between VIX and S&P and all other Volatility-Market-Index-Pairs. As a data mining project one could regress all data against all data by applying a quadratic (or higher) fitting model, hoping for significant and STABLE Parameters.
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