No ideas what any of that means so its safe to assume I dont have them.

Ok, so why are you concerned about counterparty risk? Does your arbitrage involve listed equities or any exchange traded products? Why must you use two different brokers? Is using a prime broker an option?

Assuming it is otherwise a pure arbitrage play, you are getting paid for taking counterparty risk minus transaction costs, right?

Highly leveraging such plays is an interesting way of making a small amount of money most of the time vs going broke a small amount of the time. Worthwhile if you are working on commission. Not so much if you got skin in the game.

I noticed your location is the UK, is this spread betting? I'm not familiar with how the margining and p/l flows work with that.

Why not use futures data as a proxy for expected?

Yes I spread bet although there's nothing about the stategy that's specific to spread betting.

Not sure, do we get paid for taking counterparty risk? There's liquidity being provided but mostly I think its genuine profit, though it may well be genuine profit that's worse than the risk free rate.

Its a strange beast because if it was exploitable for alpha it doesn't act to close the price gap like most arbitrage does. Either the market would have to stop offering a very common product or the transaction costs would have to go up to prevent it being worth doing.

Most likely I expect the fact it exists means that either as a consequence of arbs like this or just by coincidence its not worth doing. Cant let that sop me yet though.

not quite sure what you mean.

This is obviously speculative but what I had in mind would be for example to put the arb on many hours before events like the Bank of England Monetary Policy Committee meeting on interest rates but only if the result is being much awaited (not like at present when everyone expects no change). Then I close soon after the announcement or before if I've made my money.

To test if this works historically I need to know when in the past such situation have arisin and match it to the data. The trouble is I have no record of when such situations arose. Is there anyway of getting a database tagged for events expected to be high impact before the results were known?

Chezlaw; no offense but it sounds you are pretty clueless wrt how the markets work, and I'm very skeptical you have found a real arbitrage opportunity. If you trade through an exchange you don't have significant counter party risk (this would be the case for basically 100% of retail traders), and your initial question about using multiple brokers really makes no sense.

And if you think there is an arbitrage opportunity before some major announcement: maybe, but most market participants are smart enough to realize this and the price of volatility will be going up before an event like this. And when there are people dumb enough to not price volatility correctly you will be competing against other players who in most cases will have superior execution times and you have a big risk that you will only be able to put on the losing leg of your arbitrage.

+1. Lol if you think you're 'arbing' BoE/ecb/BoJ/Fed/SNB announcements and beating market makers, hf, HFTs, etc.

No offense taken. I expect as much. But you are wrong. Also I dont know whether to laugh or cry when people dont understand the nature of counterparty risk.

I dont know where you coming from but if you have links to some a big institution and want to to take my trades and net the positions then we are in business.

You need to read the conversation. The arbitage always exists, then there was some speculation about how to turn it into a managable strategy without netting and as it relies on market movements it makes sense to target time when the market is most likely to move.

The arb doesn't care what the price of volatility is. it relies on volatility but doesn't care what you are charging for it. Widening spreads could hurt a bit but the market is far too liquid for it to have a big impact.

Doesn't really apply. I appreciate its difficult when I haven't given the details. I certainly dont expect to price anything better than anybody else does.

I think I know how counter party risk works pretty well, so enlighten me.

Ok seriously... how can you say this with a straight face? Volatility is how much movement there is in the price. If some arb relies on market movements it relies on volatility being under priced.

Pretty sure I cant

you'd think.

I dont want to start a fight so lets not continue unless you want the business.

I'm usually willing to accept when I'm wrong, so try me: explain why you would have significant counter party risk? what kind of product would you be trading?
Yeah, because that's basically the definition of volatility.
I'am not a broker, so how would I ever be able to take your business?

Doesn't matter what product. We are talking about two positions that are two orders of magnitude greater than the profit. In the event of a black swan the profit could easily run into 6 figures,7 isn't impossible. Even a 5 figure profit during a black swan should be an obvious red flag, 6 figures and at least I would have a good story for the bankruptcy court.

sure but so what? The price of my trades doesn't depend at all significantly on the price of volatility so it doesn't care how its priced.

You seem so sure I can place these trades, was hoping you could make it happen.

Sure it matters what the product is. If for example the product you are trading contains OTC derivatives you do have more counter party risk than if you are trading something that doesn't have this risk.
If your positions are two orders of magnitude bigger than what you would make in a black swan event it almost certain that there is no arbitrage. The cost of capital in that case is probably way higher than your expected pay off, and if you start thinking about frictional costs wrt to entering and exiting the positions...
Also: making a profit of a few millions is not a case at all for the fact that there is counter party risk. Your trades are cleared through a clearing house that is going to have the capability to manage losses that are several orders of magnitude bigger. If you think a specific blank swan event could cause losses for major financial institutions that run into tens or hundreds of billion dollars you might start thinking about your counter parties. But if you worried about this; buy guns and gold or something like that...
Yes your trade does. Betting on a black swan event is betting on volatility being underpriced! Betting on a movement in prices is by definition betting on volatility. Doesn't matter if it's just random daily movement, or a black swan event.
I'm sure you can just place them at any decent broker.

As long as we are gareeing there is counterparty roisk.


welcome to the thread.

Its almost impossible to imagine huh!

I'm not betting on a black swan. You could try reading the thread.

I'm sure that is true. Unfortunately I know you are wrong.

Heilko I'm not sure if you're just being a pain or are interested but in case its the later.

These are inconsistant. If the arbitrage only fails because of the huge cost of capital then it works at one broker because I can can net the positions and dont have to provide all that capital.

It should then be obvious why one broker wont take the trades but even if it isnt obvious its why I started this thread to see if there was another way to net the positions

repo

this is how many investment firms lose $

Also worth noting that in a 'black-swan event', the fact that hes holding these trades with two different brokers almost guarantees the losing leg will be liquidated with terrible execution and he will now have a big directional trade on at the worst time.

As far as your data- I think you'd want to look at Short Sterling futures and GBP LIBOR rates before and after BOE announcements. For USD, you could use Fed Funds futures and LIBOR/Eurodollars data.

These are all exchange traded products, so there is settlement risk (DVP) and clearinghouse risk. The settlement risk is quite small, but it does happen from time to time (MF Global, most recently), but clearinghouse risk is negligible. However, I believe it is unavoidable. I don't believe that any credible central bank (Fed, BOE, ECB, BoJ) would ever permit a "black swan" surprise when they are announcing a schedule rate announcement. That would violate the first rule of central banking.

FWIW, I don't think this is a very profitable opportunity given the cost of capital and the leverage required to give a justifiable payout. Anyway, GL.

Thanks.

I dont think anyone knows what causes black swans, possibly nothing causes them. Rather than try to outguess them I want to take the approach of assuming they will happen and being best able to survive them. I'm often struck when reading about nickels in front of steamroller type strategies how the participants know the type of strategy they are following but focus on the nickels rather than the steamrollers.

Its looking very marginal at the moment. Oh well.

You were still supposed to be arguing when I got back.

Looking at 1 penny on 2 dollars (your order of magnitude taken as given) minus transaction and spread and margin costs...

Pretty sure you can do nearly as well or better stuffing the money in a mattress unless you regularly fall asleep with a cigarette in your hand.

I did look into it, and if you had a couple of billion dollars on hand, you could pressure your banker to agree to let you use the float from the short side to buy short term US treasuries to make it nearly a 0 ev transaction.

There hasn't been any argument about viability except with those who think its more viable than it is because they ignore counterparty risk.

but as you want one
It pretty much includes transaction and spread costs. That just leaves margin costs which is the killer.

The 1 penny on 2 dollars is misleading (in fact meaningless) because it depends how long it takes to make the penny. You could say a high interest account only makes 1 penny on a million dollars.

In this case, the proper thing to be looking at is the frequency AND length of the trade, not simply the length of the trade. If you can't complete the cycle frequently, you aren't going to find that it is worth your while.