ETF / Futures Arbitrage: SLV against CME's Silver (SI)

This is the spread built from trading a block of iShare's Silver Trust (SLV) shares against one CME-listed large Silver (SI) contract.  The December, 2011 silver contract was recorded in this study due to the low bid/ask spread and subsequent liquidity.  The SI contract begins trading on Sunday evening, hours before liquidity is introduced to the SLV shares, visible on the left of Chart A.  The introduction of SLV liquidity allows for the construction of the spread.

September 26 - 27, 2011

Chart A

Chart A.1

September 26, 2011

Chart B

Chart B.1

   

September 26 - Opening Minute

There was a slight break that occurred during the opening minute of SLV, however the deviation appears to have been caused by halted quotes in the SI leg of the trade.  It remains to be seen whether this halt in SI was a error on my end on account of my taq data collection software or if the SI contract actually was halted at the exchange level for several seconds.  Below are the corresponding prices of SLV and SI (left) and the deviation in the spread (right). 

   

Level 1 Volumes & Prices During the Opening Minute

Below are the level 1 bid/ask prices and corresponding volumes for the two securities.  The offered volume on SLV (the red bars) began to increase as the prices of SLV rallied while the SI contract, for whatever reason, remained unchanged.  This appears to be evidence of high-frequency firms placing resting orders on the SLV offer in an attempt to capture this mispricing.  Around 08:30:53, prices in SI revert to 'normalcy' and the spread collapses.

Chart C

Chart D

Similar, although less severe, breaks did occur during both open markets (see Chart E.1), however these will be explored in forthcoming posts.  The volume of quote changes makes this amount of data very difficult and tedious to work through.  Excel becomes very unstable and unresponsive operating at the "zero bound".  If anyone has any recommendations on alleviating this issue, I am all ears.

September 27, 2011

Chart E

Chart E.1

Global Gold: HKFE-listed GLD spread to CME & LIFFE

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 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

An Update on the NYMEX Gold Curve

Prior curve here.

The CME GC contract.

There are many gold futures contracts listed throughout the world in a range of currencies and sizes.  A forthcoming post will look at the relationship between CME, NYSELIFFE, and HKFE listed gold futures.