What are the pairs trading opportunities for retail traders that exist in the market? Obviously, the small nanosecond divergences that are eaten up by HFT traders do not qualify, so what divergences would be there for the average folk? Divergence time frames - minutes, hours, days, etc. Asset Classes - Futures, Equities, Forex, (Options?), etc that are highly correlated. Thank you. -Robert
Arbitrage (as mentioned in the title of the thread) is the simultaneous purchase / sale of assets to profit from a difference in price. In the current market environment, arbitrage is virtually non-existing, definitely for 'retail' traders. In your post you use a different term (pairs trading opportunity), which is a term most used among equity traders to describe long / short positions in correlated securities (these can be individual stocks, or stocks vs. ETFs etc.) In futures markets spreads between different markets are referred to as intermarket spreads. (Not to confuse with intramarket spreads, which are spreads between different expiration months of the same underlying.) As any spread / pair trade consists of 2 (or more) legs, commissions will be higher than single-leg trades. This is clearly something to keep in mind when looking at time frames. I don't expect many (if any) 'retail' traders will be able to benefit consistently from intraday opportunities. I know that many successful prop traders are also looking at longer time frames. I suggest you look up the term cointegration (compared to correlation) when you are looking at relative value (=mean reversion) trades. Finally, look at other features of (well balanced) spread / pair positions including lower volatility and margin reduction (especially futures). Hint, mean reversion is not the only way to trade.. Hope this provides some food for thought...
I have done some pure arbs on futures and futures options a few years ago( around 2011-2012 ). My conclusion was even if those opportunities appear sometimes on more obscure instruments( one trade a week or so ) and are available for a few minutes , the time required to develop scanners ... is really too long compared to what you end up making. And don't underestimate the error factor when you miss the leg in or imagine arbs when there is none...The money in arbitrage is actually in the HFT arbitrage on obvious instruments where the retail trader can't compete.
I actually used the wrong terms. I was thinking Pairs trades, and spreads. Pure Arb would be out of the question. What Forex pairs, futures contracts, and/or options are best for pairs/spreads?
Heres some free advice. You're just as likely to get your scrawny ass kicked trying to game an apparent arb as not. see the arbs in VIA right now as example.
It's almost impossible to do it as a retail trader even with portfolio margin. There is really only one strategy that will allow you to make a living regarding arbitrage in a retail account. And sorry, it ain't free. Now to get onto the topic..... You need a JBO, or get a RBH account. Deposit prop firms can offer you a RBH account. Pros/Cons: Retail Pro's: Low capital required to trade Retail con's: 1.) Margin. Margining can change any second the broker decides. Seriously, cough cough "margin call" 2.) Leverage. Compared to a professional account the leverage is a joke. The only saving grace is portfolio margining, and you are not allowed to hedge with futures in that account. 3.) Commissions. Most brokerage houses that are not in the billion plus deposit category churn you with large fees. Compare 4.95 to 10 cents or less a trade and you can see how they can pay for 24/7 support. 4.) Availability. Retail brokers don't offer the ability to short/trade what you need at a moments notice. IB is far and away the best retail broker(barring the margin algo) but even they can't compete to help you without insane spreads. 5.) Financing/borrowing. Retail brokers give you almost zero borrow except on a collateralized portfolio. Prop/banks will give you much much more leverage if you need it. 6.) Data. Would you like to read today's news 2-15 minutes after it arrived? Many traders base decisions off news releases, and getting them almost instantly does matter. Professional account pro's: Very simple, everything I've listed above is better in a professional account. The main just of it is, leverage. That's my point. You could trade $100 million with only a million in your account if you're hedged right. That's what arbing is. P.s. Read Sec 15c3-1, and until you understand every word, don't trade.