I'm curious to know how any program traders, specifically index arbers, can make any money trading against the specialist, especially since the spec's have adjusted their trading to spread with the spoos...it seems to me that the specialists have, in effect, become index arbitrageurs themselves...and program traders who try to do index arb at the NYSE are essentially trying to bet against the house now... Any insight?
i think it's more the arbs dictating what the specialist can get away with. to narrow the arbs come in, too wide and the specialist plunders. the nyse can see the arbs coming and get out of the way. first one in wins, everyone else overshoots.
so basically the spec is going to know what limits the arbs are set at (because he sees these trades coming in doing 1 in every 5 of his shares) and take a little off for himself, then ride the arbs back in again... man, what a perfect business model... "make that an NYSE execution!" "the world puts it stock in us!"
The way I see it you can learn how to play the game, or side on the sidelines complaining. Sure, multiple times a day I pound my desk and scream at certain specialists...but it's a heck of a lot better than playing that garbled mess of quotes called Nasdaq.
i'm not complaining at all...my guy is a total prick...i was just remarking at what a perfect business model the NYSE has...
Most desks let you overweight/underweight certain issues to juice your results, or position trade around indexing. Also, some desks will guarantee the inside market for up to x number of shares for the index guys to get the order flow. If MMM is trading 125 to 125.14 and a basket comes in to buy, the arb can get someone to put him up on say 700 at .14 even if there is 100 offered there because of the volume(commissions) he is trading are so frequent. This only works or bank to broker or broker to broker business. But, your point is well taken, not too easy anymore.
yeah that's something i wonder as well, whether or not they use market shorts, don't short at all, or simply use conversions (deep ITM puts or deep ITM calls). since index arb is a low-yield strategy normally employed by BD's (like IB) with tons of free capital, i wouldn't be surprised if conversions add too heavily to the cost.