This is the arbitrage constructed from four gold futures contracts, all denominated in USD. The four contracts include: CME's GC contract, NYSELIFFE's ZG and YG contracts, and the HKFE-listed GLD contract (not to be confused with the US-listed ETF of the same symbol).
The similarities of these contracts make this structure a relatively simple one, however if the many contracts listed in other currencies, with different quality grades and weights of varying sizes are included, the complexity of arbitrage grows exponentially.
The similarities of these contracts make this structure a relatively simple one, however if the many contracts listed in other currencies, with different quality grades and weights of varying sizes are included, the complexity of arbitrage grows exponentially.
The bid/asks of the four contracts were recorded from 7:00PM CST July 25, 2011 to 3:05PM CST on July 26, 2011.
This is the overlapping hours where all four contracts are open for electronic trading.
The GLD Spreads.
GC / GLD Spread, 7pm - 4am
GLD / ZG Spread, 7pm - 4am
YG / GLD Spread, 7pm - 4am
A closer look at the turbulence occurring around 2:30am CST in each relationship.
YG / GLD Spread, 2am - 3am
The CME / LIFFE spreads are forthcoming.
Further Reading:
Limits to Arbitrage and Hedging: Evidence from Commodity Markets
4 comments:
Hi,
I'm really enjoying your blog.
What are the mechanics of profiting from the spread? How might one extend the time frame beyond the realm of millisecs?
Thank you.
RS
Unfortunately due to the ease with which these contracts can be traded, without significant price disruption and the ability to adjust limit orders at lightning speed, these opportunities cannot be traded.
Thanks for your reply. In that case, why not look for arb opportunities over longer time frames? There are so many more spread relationships (relative value, converg/diverg) across different markets that one could actually trade - that is if the point is to profit off variant perspectives and not compete on technology; or you might combine the two but not for HF. I might be mistaken though.
I believe there are arbitrage opportunities to be found up and down the futures curve and in and out of the unique derivatives available on each contract. Coupled with the global ETFs and their derivatives listed in different currencies, domiciles, and tax regimes, the global gold relationships become increasingly dynamic.
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