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| Full Trading Period |
The
CHF/
NZD and
JPY/NZD currencies were used to build a live
synthetic CHF/JPY which was then spread to the live
real CHF/JPY available on
Idealpro (left axis). The corresponding spread (right axis) is given by the orange/green combo hovering around parity (= 0). Prices were recorded Sunday, 2 October through Monday, 3 October, 2011.
The Opening.
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| Sunday Evening Opening: 4:06PM - Midnight CST |
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| Sunday Evening Opening: 4:06PM - 7:00PM CST |
A curious widening of the spread occurs right around 9:00am CST. Seconds after this loss of liquidity, a slight break occurs in the synthetic/real relationship (Figures 1 and 1.A), leading to the first visible arbitrage in the recorded series. A 2nd break occurs just over an hour later (Figures 2 and 2.A).
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| Liquidity Gap |
Arbitrage 1.
In the first occurrence, the bid of the synthetic (Dark Blue) rises above the offered price available through the live CHF/JPY (Purple). The synthetic could have been sold while the live CHF/JPY was purchased for an offsetting amount, resulting in a perceived profit subject to the minimum liquidity available across all the necessary legs of the trade. Prices broke again in the opposite direction (Red below Green) a fraction of a second later. After which, they quickly reverted to their "no-arbitrage" relationship.
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| Figure 1 |
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| Figure 1.A |
Arbitrage 2.
In the second (or third) finding, the opposite break in the relationship occurs. The offered price of the synthetic (Red) falls below the bid price of the live CHF/JPY (Green) allowing the high-frequency trader to take advantage of the arbitrage, purchasing the synthetic and selling the live market. Again, the availability of the trade is subject to the minimum quantity available on every leg of the trade.
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| Figure 2 |
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| Figure 2.A |
