Comments on: Trade recap for November 12th: Reverse pseudo-arbitrage

By: Jamal Chahboune

Jamal Chahboune — Fri, 13 Nov 2009 03:24:02 +0000

No, spread betting is commission free. It’s the kind of thing where bet sizing has to be perfect and slippage has to be minimal though. This would be more of a strategy for a computer than a human though, imagine trying to figure out the correct position size for multiple posiitons in two different currencies when you have $456123.18 over two accounts and the exchange rate is 1.6546 lol

Theoretically it works, practically it’s a real pain. Your strategy is better in that respect.

By: Reaper

Reaper — Fri, 13 Nov 2009 01:30:51 +0000

There has to be some problem with this … you cannot in real life have a strategy that generates profits under all circumstances, or it would be arbitraged away. I assume that the problem with this is that fees / commissions would kill it.

And yes, my strategy is not true arbitrage. I call it reverse pseudo-arbitrage because it is in essence betting against the typical pseudo-arbitrage strategy of betting that spreads will decrease. While my risk is certainly not guaranteed, in practice this works well for me and my downside is limited. Even better, this strategy will perform best in times of crisis (when spreads widen as pseudo-arb traders get killed).

Of course academics would call it fake arbitrage because there is risk. Real arbitrage has no risk.

By: Jamal Chahboune

Jamal Chahboune — Thu, 12 Nov 2009 23:36:32 +0000

sorry the profit of the first outcome is 61 pounds not 11.

By: Jamal Chahboune

Jamal Chahboune — Thu, 12 Nov 2009 23:35:14 +0000

Another arbitrage strategy if you are happy with bond like returns is a forex one involving spread betting. Say GBP/USD is at an exchange rate of 2 (it is nowhere near that at the moment but lets keep it simple). You would short one standard forex lot (100,000) which would result in $10 a pip in movement, and balance that out by spread betting the exact opposite in pounds at the current exchange rate. So that would be 5 pounds per pip since 10/2 is 5.

Regardless of the outcome, you would make a profit…

If it rallies 500 pips (2.0500) you would lose 5000 dollars because you were short, but you would make 2500 pounds. the 5000 dollar loss at the new exchange rate of 2.0500 is 2439 pounds. so that means that total profit would be 11 pounds.

if it tanks 500 pips you would lose (1.9500) 2500 pounds because you were long but you would gain 5000 dollars which at the new exchange rate of 1.9500 is 2564, a total profit of 64 pounds.

it works in theory but in practise its just annoying and i would rather short these POS stocks lol.

by the way what i wrote is actual arbitrage since it covers all outcomes. what you are doing isn’t arbitrage at all, it’s just another one of these pairs trades. i hope you make money on it but i thought i would share the forex strategy as it is intellectually fun to grasp!