Recently, I’ve started to delve into the world of what the professionals are starting to use nowadays. Namely, high-frequency trading, low latency trading, algorithmic trading, quantitative analysis/finance, statistical arbitrage and something what I am interested in… Index Arbitrage.
From my, extremely, basic knowledge, I’ve come to understand that Index Arbitrage is trading the discrepancies of an index in context with the markets it uses to gauge itself. This would require very fast execution times and trades could last no more than a minute, or even a second!
My question is, [B]can this be done with Forex? What do you guys think?[/B] For example, why not take the US Dollar Index and it’s components and when a discrepency is detected, take advantage of it and trade it to equilibrium? These movements could be just a few pips at a time, but would definitely add up.
This may be out of the range of this forum, but I’m sure the Dow, S&P 500, equities and futures indexes can all be applied to this concept.
And I’m sure it has been done at higher level institutions. So another question is, [B]can retail traders like you or I achieve this kind of trading[/B]. Perhaps one would have to upgrade their computers or Internet to something slightly better, but no individual could possess the technologies that the larger funds own.
This is something that really interests me and I look forward to everyone’s insights!
I think if you could come up with a system that worked the thing that would make it or break it would be your broker. You would need a retail broker that would allow such fast trades.
Yeah I’m sure a system could be devised to carefully trade these discrepancies. The hardest part would be the amount of resources one needs, I’m trying to think of ways for a retail trader to do this in the comfort of one’s home with a decent setup, without breaking the bank.
This is a very real way of making money, problem is that you are out-gunned right from the start.
I mean they even go so far as to locate themselves in geographical proximity to the exchanges, so that the latency of their order execution is reduced by milliseconds…
I think about that and just feel that it’s an arena not worth entering…
I was just mentioning the idea, but what if one were to be able to make a longer termed system based on this concept though. I understand that a regular person, especially a student, does not have the resources to compete with the world’s largest hedgefunds in terms of execution speed. But what if we could find a way to use this concept as a means of trading it long term? Long term could still be in minutes, considering they are taking millisecond and second trades.
I know you are involved with ICT’s methods AND eremarket’s methods. Is there not enough profit potential there for your liking?
I think you are like me… you want to “discover” a way of making money that is more your own… even if it means pushing tried and tested methods aside. I lost a lot of money chasing my own ideas, trying to reinvent the wheel and such, and look where I ended up after all that!
Look, I don’t want to be the downer guy all the time, I wish I could say “Hey Clark, that’s a great idea, pursue it!” but the honest side of me knows you are just wasting your time, and I hope you can see the good intent of my comments
Haha, there’s more than enough there to make me 7-figures in about a year. I’m not worried about profit potential.
I agree with you. But the aim isn’t to go looking for a new system, my aim was to look at the markets in a different perspective. I am a finance/economics student and it’s something I love looking at in different perspectives.
You know that I’d either like to daytrade or set up a hedge fund, so I guess this is just beginning of the latter. Like I said in ICT’s thread, I’m trying to look at trading more professionally.
Who knows this thread might help someone else see the different ways to profit from the market. Once again, yes, I agree, I do alot of work with Michael’s and Jay’s stuff. More than enough to make me a solid 8 (yes, eight)-figures in 3-5 years I feel.
Well that’s true Clark, I bet some of this stuff would really impress a Finance Prof, lol!!
At the very least, you could probably use the idea to write some papers and wow some profs in your later years. I see the value in that
Remember, Professional simply means that you do it for a living…consistently. If you’re saying you got that part down already… you are a Professional already!
Yeah no doubt, they wouldn’t understand how a “dumb” kid knew this.
Well, I believe Full-Time means to trade for a living, and consistently, without the need for another source of income. BUT professionally, would be0 a prop. firm, or hedge fund, something with a legal existence (not saying the human body doesn’t legally exist. :P). That’s what my goal in the future is, after I get my degree and certification. So might as well start while I’m young, building a solid network of traders and peers to bounce ideas from.
PS. Pine Bay Management, LLC will be known worldwide, come 5-6 years down the road.
Not completely on topic, but this subject reminds me of a 60 Minute clip on CBS I watched sometime ago on HFT. If for nothing else, it’s rather interesting to watch during a break from your charts/studying:
Alright, let me yield for a minute, and say that I too once dreamt of running a hedge fund and being immersed in the professional world. Especially while I was still in the University environment… it really gets you feeling like you can take on the world!
But underneath the company names, the titles, the legally binding contracts, and the commercial property with 4000 sq. ft. of desk space and a nice parking spot with a plug-in for your Benz… they are just trying to make money. It all means NOTHING if you can’t make a buck, and they know it. They seek talent. Be the talent, and you will always have security in your income… Title or No Title
Of course no objections there, I need to have the skills required as always. But ultimately that is where I would like to go. I have two guys on my floor that just recently incorporated their hedge funds actually.
I’d probably set up a hedge fund… at home though, home offices are awesome.
Jason Fielder - most of you know the guy, is flogging his latest “discovery” which provides some insight into the possibilities of arbitraging the retail forex market. In any case its educational value is worth the time to watch the video.
The failing will be trying to do it from a retail broker site.
Between the spreads, and latency, an account would die a slow painful death.
As mentioned, the guys who DO make money at the HF level, have their computers right next to the exchanges, and they are probably trading at the market maker, bank, or broker level themselves.
Interesting discussion.
Long term, I think HF trading is in the crosshairs of the FTC. If they reintroduce the uptick rule, it’s a gonner.
Yeah it’s a fragile subject definitely.
Have you seen the video CodeMeister has put up? Just watched it, mind is kind of boggled and interested to see if this is actually do-able, without of course, shelling out the $2000 or however much it is…
Remember that there are two kinds of retail traders, those who trade in standard lots with 100% ECN connection, and those who do not. Anything other than standard lots suffers immediate liquidity troubles, and anything other than a 100% ECN connection suffers from Internet lag time, and all of that assumes that all goes 100% well with your trade.
That would just mean you can’t play $200 accounts, but rather 5,6-digit accounts equiped with a good ECN broker + good trading setup with some mean Internet connection. I don’t know I’ll look into it.
CodeMeister, first time seeing something like that. Do you have any experience with it? My problem is how it’d manage a loss.
Your arbitrage theory is good and makes good theoretical sense, but then there is reality, quite divorced from theory, and remember the old saying that the road to hell is paved with the best of intentions.
So might as well start while I’m young, building a solid network of traders and peers to bounce ideas from.