ETF / Futures Arbitrage: NYMEX Gold vs. two non-USD ETFs

This study combines the principles of ADR and ETF/Futures arbitrage.  Prior examples of ETF/Futures arbitrage have only included US-listed futures and US-listed ETFs.  ADR studies on the contrary have included many foreign listed, non-USD denominated assets.  It is the goal of this and future studies to expand on this research by including multiple legs and various competing securities (for instance, comparing cash FX vs. futures FX as a hedging vehicle).

Both ETFs in this case suffer from a significant lack of any meaningful depth in the order book.  The bid/ask spread of each ETF make them prohibitively expensive to trade intraday as well, especially given the volatility of the studied periods.  The markets overlap from 22:45 CST to 05:00 CST, and both studies were recorded June 20, 2012.

ETF / Futures Arbitrage: Deviation in Practice

This is a basic ETF / futures spread built from a block of shares traded against an offsetting futures contract.  Several breaks occur in this study from August, 2011.

Hi-Res

Hi-Res

Hi-Res

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

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]