ETF / Futures Arbitrage: SPY & E-Mini S&P 500

A continuation in the series, this is the spread between SPY and the CME-listed E-Mini S&P 500 futures contract (ES).  The September 2011 ES contract is used on account of liquidity and the spread [pdf].  Prices were recorded August 26, 2011.  All times are CST.

The two securities from 3:00am to 3:00pm.

The SPY/ES spread from 3:00am to 3:00pm.

The SPY/ES spread from 8:30am to 3:00pm.

The outright prices and the corresponding spread from 8:30am - 9:30am.

Still working on the Ultra ETFs.

ETF / Futures Arbitrage: GLD and CME's Gold Contract

This is the spread constructed from trading GLD shares against the CME-listed Gold futures contract (GC).  This is the oft cited index for global gold prices and has been used as the basis for other relationships explored in the past.  Synchronized, high-frequency quotes and volumes were recorded from July 21 - 22, 2011.

Each day's spread individually.

   

Some of the major turbulence in the spread occurs July 21 around 11:40am CST.  The following is a closer look at the volatility of the relationship during this period.  The left chart is the full hour, from 11:00am - 12:00pm CST, and the right chart is the 15-minute period, from 11:40am - 11:55am CST, marking the first of a series of significant downward pressures on the GLD/GC relationship.  

   

Because the spread was quoted to the Gold contract (GC), this suggests the bid in the GC contract was under significant pressure, subsequently transferred and absorbed by low-latency cross-asset arbitrageurs who then hedged their long GC exposure by selling short the GLD vehicle (or managing a significant inventory of both assets in an attempt to stay "net flat" [pdf]).

ETF / Futures Arbitrage: FXE and EUR Futures

This is the arbitrage constructed from trading the CME-listed EUR/USD Futures contract (6E) against the CurrencyShares Euro Trust ETF (FXE).  Similar posts can be found discussing the IWM/TF and FXB/6B spreads.  The synthetic spread between the two products can be bought or sold, depending on which trades you make in the underlying legs (6E, FXE).  Due to the nature of both Globex and the many electronic markets providing liquidity for FXE, this particular trade is once again relegated to the realm of microsecond and co-located trading.

3:00am - 3:00pm CST, April 8, 2011

6:09am - 3:00pm CST, April 8, 2011

6:48am - 3:00pm CST, April 8, 2011

Opening 5 Minutes, 8:30am - 8:35am CST, April 8, 2011

Opening Hour, 8:30am - 9:30am CST, April 8, 2011

Full Open Market, 8:30am - 3:00pm CST, April 8, 2011

Closing Hour, 2:00pm - 3:00pm CST, April 8, 2011

Further Reading:

Why We Have a Correlation Bubble (pdf) (JP Morgan's Global Equity Derivatives & Delta One Strategy)

Liquidity Dynamics and Cross-Autocorrelations (pdf)

ETF / Futures Arbitrage: The Russell 2000 Index (IWM and TF)

A primer on this type of trade can be found here.  

This is the spread built from 1 ICE-listed Russell 2000 E-Mini futures contract (TF) traded against the iShares Russell 2000 Index Fund ETF (IWM) at a fixed ratio.  The data was recorded July 26, 2011 and consists only of the open market hours (8:30am - 3:00pm CT).

The Spread.

Trading The Opportunity.

The IWM/TF spread is offered at 60 at 11:45:41.991 AM, meaning the synthetic structure built from the combination of IWM and TF can be "purchased" for $60 per spread.  This is, of course, subject to enough liquidity available in the IWM shares.  

At 11:46:07:755 AM, the spread is 110 bid, meaning the synthetic structure can be sold at a price of $110 per spread.

Low-latency traders that operate in this space are competing for these opportunities.  

ETF / Futures Arbitrage: FXB and GBP Futures

This post is a follow up to the recent interview with Allston Trading's Peter Nabicht, in which Mr. Nabicht alluded to putting "on a trade at the CME and we want to hedge it with an ETF." The following is a deconstruction of just such a trade.

Below is the spread constructed from trading a block of FXB shares against 1 CME-listed GBP futures (6B) contract.  Not surprisingly, all of the opportunities to trade this (profitably) are securely tethered to the millisecond level.  In addition to the technological arms needed to execute this trade, proper facilitation also requires extensive order-book and inventory management [pdfs]. 

The Outrights.

The two securities are not meant to be purely fungible, so it is not a pure arbitrage.   They can however be traded against one another and used as pricing mechanisms for each other.  Relationships like this were very involved in the "Flash Crash" [pdf] of May 6, 2010.  As liquidity dried up in one product, the pricing mechanism lost integrity and caused the pricing of other assets to suffer in conjunction.


As Andrew Haldane notes, "HFT liquidity, evident in sharply lower peacetime bid-ask spreads, may be illusory.  In wartime, it disappears."

Pre and Open Market Spread

    

Pre-Market

Opening Hour

Entire Open Market

Closing Hour

This is the strength of the relationship Mr. Nabicht described before and the playing ground of low-latency traders.  More examples to follow.

Further Reading:

Interlisted Trading: Impact of Interlisted Arbitrage Volumes on the Canadian Marketplace [pdf]

Exchange Traded Funds: Consequences of Expansion [pdf]

Index Arbitrage for the Do It Yourselfer

This is the process used to construct a pseudo-Index Arbitrage (similar to Delta One) model of the SPDR Dow Jones Industrial ETF versus one of the front month ECBOT-listed E-Mini Dow Jones Industrial futures contracts.  Our software is proprietary and was developed from scratch (not by me).  We are currently using IB's TWS as our medium to the markets.  It is my chemistry set.

Constructing the Spread.

Step 1: Define your bases.  Name your series.  In this case we name the file "DIA_YM".  The "t13,t14" corresponds to two of the variables on the left with open connections.  t01 through t12 are other securities currently being referenced by the software.

Step 2: Input your "proprietary" algorithm(s) of choice. As shown, currently blurred in boxes e01 through e06 (sorry, can't give it all away).

Step 3: Hit the LiveTrack(c)!

Step 4: Wait a few minutes and take a sample of the data.  This is very high-frequency, synchronized trade-and-quote data for the DIA/YM pair.  Synchronized (discussed here) meaning when any predefined variable (bid, bid size, etc.) changes, a snapshot of the entire set is taken, time-stamped down to the millisecond, and logged.

Step 5: Finally, check the result.  159 variable changes during 2 minutes and 13 seconds of sleepy after market trading.

We're no Tradeworx, but it's a start.

Further Reading:

High Frequency Data Filtering [PDF]

Clustering Techniques Applied to Outlier Detection of Financial Market Series using a Moving Window Filtering Algorithm [PDF]