Arbitrage Opportunity in Equity Markets

Discussion in 'Order Execution' started by WallstYouth, Nov 19, 2008.

  1. Under what scenarios could arbitrage opportunities exist in today’s equity markets? I know arb trading isn’t for the small guys but I'm just curious if and when is it happening?

    The only example I can think of is in a scenario where 2 ECN's are listing the same stock and a large buy or sell order comes into one of the ECN's and before the order is printed on the tape the ECN starts to reprice the stock based on the buy/sell order that came in? And someone connected to both ECN’s could see the inconsistency between the prices of this stock and issue a buy/sell or visa versa on both ECN’s?

    Would this be a valid scenario? Does this still happen today?
  2. trom


    Yes it still happens.

    But, it's usually only for a penny or two and a very limited number of shares. Really not much opportunity there.
  3. I don't see money to be made in pure (risk-free) arbitrage in common shares.

    There are some opportunities in long-term convergence trades though. For example take a look at EEP and EEQ. EEP is a pipeline master limited partnership and pays cash dividends. EEQ is a wrapper company around EEP (its only asset is EEP shares), and pays dividends in additional shares rather than cash. 1 EEP is roughly equivalent to 1 EEQ. Their prices alternate about +- 10% around parity. You could take a dollar-neutral long-short position when the prices diverge and close out when they hit parity again. The price risk is very low - and you can manage the risk of convergence time (may take from a few days to many months) by experimenting with time base stops.
  4. There is significant arbitrage opportunity out there but to give away any information on that would not make sense. If I see it I take all the shares. 15-20% of my income this year is from such trades.
  5. Many of the fixed-income ETF's are way out of line right now.