Global Arbitrage

Discussion in 'Strategy Building' started by BlueHorseshoe, Sep 22, 2003.

  1. Wondering if anyone else is pursuing/practicing this strategy??

    For instance, when big news breaks in Asia we will see the Asian markets react, and then see relatively delayed reactions in the European markets and in the US pre-market futures??

    A perfect example was Monday following the G7 meeting. Markets tanked in Asia, w/ Japan down +4%. Later, DAX Futures opened -60 points and slide to more than -100 points. We also saw the US futures slowly melt in the premarket over the course of several hours.

    I've begun placing some trades to exploit this phenomenon and have done well. For instance, if I see Asia getting pummelled hard I will short the US futures on Globex and short Euro Indices as soon as they open.

    'Global Arbitrage' is not an accurate description but you get my point. Interested to hear from others who do this, and if you follow strict rules for entering exiting positions.
  2. i don't do this, but i have thought about the idea that international markets must trend together in predictable ways, or perhaps even display logical flows between international markets as momentary inverse correlations.

    my big aspiration (once i have the resources) is to set up a room full of giant screens with every major world index and commodity market overlapping during their common hours -- and to watch them flow into each other. i can definitely imagine opportunity in what you're talking about. seems logical enough from the viewpoint of a relative beginner. i imagine when you can see them all, certain relationships will just jump off the screen.

  3. me included ... although on a small and limited scale

    used to play mutual funds like this .

    if the USA had a very strong close we would buy those USA funds that had strong international exposure for the expected bounce
    the next day :)

    this opp. is not possible as much anymore as most the funds
    now charge early redemption fees
  4. Kap


    " delayed reactions" - not sure about this ! if u think u can profit from such a simple observatiuon you are mistaken.. if theres a big move the Euro markets openings will reflect this, typically more over bought or over sold in the anticipated direction, historically your better off punting in the other direction.

    There are no "gifts" out there, the market is always right.
  5. TD80


    I've begun trading eurpean futures for a few days and I must say there are definite *apparent* correlations between various instruments in different overlapping markets. Generally these are tip-off's to the legitmacy of one instruments move during the overlap by looking at how the other is behaving. I would use it as a sort of fuzzy indicator to layer on top of a strong strategy that is already profitable.

  6. Dude, Japan's Nikkei 225 did a perfect ending diagonal, and died 800 points in 2 days. I don't know if you can really say that that you can catch the trend in another market because neither the NDX, SPX, INDU, nor RUT has had a 7% down move in the last couple of days. We haven't even come off of the Friday high on the RUT.

    Each market is a little bit different. Look at Japan's Bear market v. the US Bear. They are totally different.

    I think that there are times in which many markets are in sync, and they "train" you to think that you can take advantage of these "inefficiencies."
  7. Dude, some thoughts:

    "Japan's Nikkei 225 did a perfect ending diagonal, and died 800 points in 2 days." Believe it or not, there is more to market movements than technicals my friend. Yen broke through government resistance on policy decision, with implications for global currency rates. It takes time for this to sink in with all market participants. Hell, foreign investors were net BUYERS on the open of the Nikkei Monday morning.

    "I don't know if you can really say that that you can catch the trend in another market because neither the NDX, SPX, INDU, nor RUT has had a 7% ..." I don't know what you consider 'catching the trend' but on Monday one could have definitely caught a .5% intraday move in either the European or US markets. With size that can make for a nice payday. I rode that 'trend' for several hours that day.

    I never said this is something that should be traded day in and day out. However, I have observed that when a major event occurs, such as a disaster or major news event, that when the markets have begun a short-to-medium term trend, rather than trade in the current time-zone it is often better to jump ahead to the forward (US, Asia, Europe) markets. If anything else, this allows one to ride the trend longer than would otherwise be possible without holding overnight.
  8. Most Asian and South American economies have the US as their largest trading partner. Most European economies seem to do most of their trade with other European economies. So I assume that looking at relationships between South American or Asian markets and the US should be a good starting point.

    I figured that since Asia occupies a different time zone from the US, it might be more interesting to look at Asia.

    Within Asia, Singapore, Korea and Taiwan are less commodity based than other economies. The HK and Japanese markets, I would guess, are more independant of the US for a variety of reasons.

    I've looked at STI and TWII vs the S&P 500 and there is definitely correlation between the S&P 500 daily performance and the next day open in the STI and TWII (which is abt 5 hours after the NYSE close). Measured from Feb 99, the correlation coefficient is 42% and 46%.

    But when you look at the correlation between the S&P 500 daily performance vs the daily performance in the Asian indicies the next day, the correlation drops to -1% and -16%.

    So, no surprise, it seems that the value exists around the Asian open and evaporates quickly. Designing a mechanism to (legally!) capture that is the challenge :)

    be interesting if someone else has studied whether the reverse is true - do foreign mkts impact the US? A lot of people do watch the European mkts before the US open, but it could be just one of those things which everyone believes is significant but really isn't.
  9. Nice post. That there is +40% correlation but -1 to 16% correlation from US to Asia 'the next day' would perhaps suggest that the Asian markets lead?!

    I haven't done nice studies like yours but my trading day starts in Asia and I look for movements that begin in Asia to continue in European and US markets. Most telling are the tech - heavy markets of Taiwan and South Korea. Both of these markets export lots of tech equipment to US OEMs & thus I would suspect that the correlation with NQ is better than with ES or RUT.
  10. bone


    I think that 'global speculation' would be a more apropos term. It is healthy that you are acting upon intermarket correlations.
    #10     Sep 26, 2003