The future is all about cross-asset arbitrage | FT Alphaville

The future is all about cross-asset arbitrage

What happens when computer-driven trading reaches a high-speed saturation point?

That is, when high frequency trading reaches its natural limit — it simply cannot get any faster?

The answer is multi-dimensional arbitrage.

A new report from the Tabb group believes that’s exactly what’s happening and that as a result, HFT traders are seeking unexposed alternative markets to apply their techniques.

Justin Grant at Advanced Trading sums up the findings of the report by explaining how this is a logical progression:

Since trading speeds can’t get much faster than they already are, quant-focused firms are researching multi-dimensional arbitrage: strategies that go beyond speed, and emphasize “cross-asset, cross-regional multi-temporal, asymmetric versus symmetric trades, even enhanced front-to-back automation,” the report said.

We’ve reached just about as much speed as we’re ever likely to know, at least within individual matching engines and between New York and Chicago,” said E. Paul Rowady Jr., author of the report entitled “Quantitative Research: The World after High-Speed Saturation.”

That includes applying high-speed trading strategies to emerging and frontier markets — with Asian markets currently considered one of the biggest of opportunities and bounties to be had.

The strategies, we imagine, will likely focus on detecting arbitrage opportunities between US-listed stocks and ETFs in out-of-hours trading versus the underlying stocks and futures listed on international exchanges. A fact facilitated by the recent proliferation of cross-border exchange tie-ups, cross-listings of major index products in fresh timezones and ongoing regulatory under-sight of a cross-border trading world.

It also means applying high frequency strategies to 24 hour markets like commodities.

And arguably makes the scenario of a so-called splash-crash — a multi-asset flash crash — an ever more likely possibility. At least according to us.

No wonder there’s been so much activity in the field of manufacturing arbitrage in the emerging markets sphere of late.

Related links:
Cross-border regulation headaches
– FT
CME and Eurex in cross-listing deals
– FT
Emerging markets lure big exchanges
– FT
Asian ETF market is expanding rapidly
– FT