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]).

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