Gold Arbitrage???

Discussion in 'Commodity Futures' started by spinn, Jun 23, 2006.

  1. spinn


    OK...I am naive and expect to get flamed.

    With that being said, I have been offered a job trading Gold futures. No problem there I have been trading futures for a while. The firm arbitrages US futures markets against the Indian futures markets.

    They told me there is often a significant spread between the US markets and the Indian ones. They also said there is a barrier to entry in trading the Indian markets and because the firm is based there, they can trade it, even from US soil.

    So they tell me they simutaneously buy one market and sell the other and then reverse that leaving them flat in both markets.

    So I am thinking they buy in US and sell in Indian market when diference is say 6 ticks, which they claim is common.

    I am wondering how hard this is in the real world? It seems like the first trade is easy but reversing to flat in both markets would confuse me.

    OK....tell me why this is wrong, why it cant work, why I am an idiot. From there I will take the constructive comments and try to learn something.
  2. Let's say gold opens up at $600 in the US.

    These guys look on their screen and see it's trading @ $606 in India.

    They buy US and sell gold in India, thinking that the "real" price is somewhere around $603.

    Lots of times this doesn't work. The problem is that for the two markets to balance there has to be literally thousands or arbiteers, which only makes the spreads that much smaller.

    Could be profitable though.
  3. spinn


    My admittedly very limited experience with arbitraging was done with one market though.

    I started trading in the early day trading fiasco where you could say buy intel on Island for $45 and sell it to Goldman for $45.10. (admittedly extreme example)

    But how would this work with two markets? Can someone put numbers on this for me?

    Lets assume you buy gold on US market at 600 and sell at indian market at 606. You then have one long and one short. How do you close out the trade for a profit?
  4. seems to me that you just hold the trades until the prices in both markets are the same
  5. landboy


    Or, you could take delivery on the BUY and use that to cover your short... Granted, shipping a gold bar from India would be expensive...

    The big question when arbing is not so much trade price, but the spread between bid and ask... I assume India markets, because of their lack of liquidity, will still be efficiently priced, just that the spread would be large, eg:

    600 * 620

    While the US markets may be

    610 * 612

    Basically the only real way of arbing is hoping that the market stands still, bidding at 600 in India, if you get it, then you immediately hit the bid in the US, that's a quick 10 bucks profit... The big BUT is whether you'll ever get hit at 600... Chances are slim, and can become dangerous if the market suddenly turns down on you... Now you've got it at 600, but the US markets are now bid 595, you've just lost 5...

    The thing with Arbitrage is like the old saying, "you're picking up dimes in front of a steam roller"... Most of the time you'll win, but that one time that it doesn't blows you outta the water
  6. What is the name of the firm?

  7. The traders in this example see a difference in the price of the two markets.

    Ideally the two prices will converge somewhere in the middle.
    The "low" price in the US will call arbitraguers to step in drive up the price, because they know the gold in India is more expensive.
    The same thing works in India.

    The few guys in India that have access to New York will be calling their brokers there buying gold.

    Depending on the players on each side, theoretically the prices will settle in between.

    In any markets, arbing keeps prices equal. The more arbing, the closer the two prices follow each other.

    If you bought @ 600 US, then sold @ 603 US = $3 profit.
    If you sold @ 606 IN, then bought @ 603 IN = $3 profit.

    That's a total of $6 profit, and you're flat both markets.

    Sounds like these guys just hang around waiting for prices to blow out.
  8. spinn


    Ok but what if the market in US goes down to 597 and Indian market doesnt move much?

    I guess that is the risk.

    It seems like its worth a look. I am just not terribly well suited to trading in seconds 50 times a day but I will report back in a few weeks. The office will be opening around the first of July.
  9. It works...Should you be posting this? There are several way to arb/spread trade...

    I swear if you were one of my traders, you would no longer be...

    sure the arb world is not new...but now that you post on an anonymous many more will research this. Often a retail trader thinks that this world is unavailable to him...

    I am not worried though as this is truly the hard way to trade and your earn every pip/penny...many Retailers are looking for spikes in their equity curve, not the slow steady approach, like a job.