Is it just me or is there still money to be made in stat arbs (pair trading) ES, YM, NQ? Just pull up any intraday chart of any 2 of these, you'll notice situatiations where one of them overexaggerated a move in which another merely dropped a few ticks. I know there are large firms playing these arbs, but it looks to me like there is pleany of room for even little guys, something I'm missing?
Seems like a free lunch, lol. What's the risk? Seems very little, it's not like the indices will experience any significant divergence.
Are you kidding me. These things diverge big time. I traded these on the floor. The divergences can be quite large. And I would call it anything but a free lunch.
Do you have any examples? It looks to me like they track each other pretty closely, especially on the daily scale.
Well all the indexes are manipulated by news that hits individual stocks in the index. This is a big problem between the Dow and the S&P. The nasdaq and S&P can diverge for long periods of time due to rotation in and out of certain sectors. Basically what you'll see is a very tight high correlation for a few days then out of no where you can get a massive separation between any of them. And it happens very very fast. I use to track these tick by tick. In fact, I created my own Excel program that calculated the spreads using the formula we wanted. We also traded spreads between the individual Dow stocks and the Dow futures.
Interesting, I understand now I think. Do you still arb them or do you think the risks outweigh the rewards?
The S&P and Nasdaq diverge for longer periods of time, but I have observed that the Dow and S&P diverge and converge more reasonably, ... and is more tradeable.