Synthetic market and conversions/reversals

Has anyone had any success with this arbitrage strategy? Reading Natenberg now and back in 1986 he said these imbalances only lasted a few seconds. So, they have to be nonexistent today, right?

 

Very hard to beat an electronic market maker with a much better cost structure than you. Not worth the effort.

 

1245, this got me thinking. How many of the strategies in Natenberg are NOT worth the time anymore? I understand 2012 is a different era but I was also under the impression that this literature was timeless.

 

You see them persist sometimes in names that are hard to borrow.

 

Yes to HTB stocks, but then you're at the mercy of the broker's rate which can change at any time. All of the OMM firms run R/C capture, so there is little opportunity (read none) for anyone doing it manually or automated for that matter. If GS or SWS is charging 40% PA to carry the short you can assume that rate is in-line with the return on the reversal.

There is little opportunity for the OMM firms in this rate-environment as there is no convexity to rates under QE. Think of the R/C as D1 triangular arbitrage in FX. The systems are built from the ground-up to pick up those nickels. The result is tighter spreads for all.

 

personally just the knowledge of static replication is an asset...... going from the beginning of starting to dynamically neutralize different risks such as delta , vol, gamma, all the way to exposing yourself to only interest rate changes with static replication..
if anything i've learned its that to make money you are taking a view on something.. even market makers are taking views on interest rates, order flow, liquidity etc... you'll never get away from it..
Knowing different structures can give you a better way to express your view on the market.
it is my understanding that most market makers wouldn't take a position in the underlying if they didn't have to.. rolls and boxes are what you want to end up in unless you have a solid view on the risk you have exposure to.. and even then the business of market making is making a spread the cost is mitigate the risk.. The best you can do is find the best risk and TAKE it..