Do you think there is any arbitrage opportunity that can be exploited as a retail investor ? Any successful arbitrage strategy requires huge amount of capital, technology (trading platforms/softwares/etc.), and first-hand trading desk experience. What do you think ? Any book recommendation on the subject ?
microcaps might allow some kind of risk arbitrage, because big institutions are too large to really play with these companies, but those aren’t pure arbitrages.
Plus you need to consider transaction costs as a retail investor which deteriorate as your volume gets larger.
Viceroy Wrote: ------------------------------------------------------- > Do you think there is any arbitrage opportunity > that can be exploited as a retail investor ? > > Any successful arbitrage strategy requires huge > amount of capital, technology (trading > platforms/softwares/etc.), and first-hand trading > desk experience. > > What do you think ? Any book recommendation on the > subject ? The problem is not all this. Your main hurdle will be trading costs.
Yes of course I forgot to mention trading costs.
Merger arb is very possible with retail investors. I’ve done it. I have the proof that it is possible. TRB was going private at $25/share. It was trading at $19/20 a few weeks before the deal closed. Hell, it was trading at $22 the WEEK the deal was to close (Dec 08, and the lending was frozen beyond belief) The opportunities are far fewer, but it is possible. With deal falling apart nowadays, the profit potential is huge.
CPierce Wrote: ------------------------------------------------------- > Merger arb is very possible with retail investors. > I’ve done it. I have the proof that it is > possible. > > TRB was going private at $25/share. It was > trading at $19/20 a few weeks before the deal > closed. Hell, it was trading at $22 the WEEK the > deal was to close (Dec 08, and the lending was > frozen beyond belief) > > The opportunities are far fewer, but it is > possible. With deal falling apart nowadays, the > profit potential is huge. That proves without a doubt that it’s possible. You should start a HF pronto. You’re in L3 right ? This is depressing.
I have, I bought all this ABACUS stuff Goldman was selling me. This french guy was telling me how it was bound to go up. My attorney’s have advised me to not speak further on this topic
CPierce Wrote: ------------------------------------------------------- > Merger arb is very possible with retail investors. > I’ve done it. I have the proof that it is > possible. > > TRB was going private at $25/share. It was > trading at $19/20 a few weeks before the deal > closed. Hell, it was trading at $22 the WEEK the > deal was to close (Dec 08, and the lending was > frozen beyond belief) > > The opportunities are far fewer, but it is > possible. With deal falling apart nowadays, the > profit potential is huge. yup individual investors can do this. this is merger arbritage, price reflects time value of money and probability of deal closing. Less likely of the deal closing the wider the spread (also depends if its a stock deal). This was covered in level 2 somehwat. Can do close-end fund arbitrage too but much more risky i.e buy a close-end fund selling at discount and short the beta and wait for the spread to close. this happens alot when you have margin calls because often these funds are leverage and people run from leverage
Saw it recently: America Movil extending a tender offer for shares of Telmex International for .373 shares or 18.37 in cash. The issues traded close to the .373 par for a few weeks then suddenly TII started rising up to about 20. I owned TII at the time, sold some calls at 20, and eventually sold out of my shares, locking in the above offer gain. This could have also been played the classic way of going long America Movil and short Telmex International. This was available to any retail investors, both issues traded around 1m or more shares a day.
Ok, I just looked at TII and a new opportunity exists Buy TII (http://www.google.com/finance?client=ob&q=NYSE:TII) for 17.46 at the open tomorrow. Tender your shares for 18.37 cash. So you’re looking at a 5% profit right now outside of transaction costs. So buy 1000 shares, tender and you lock in a $900 gain on June 9th when the offer closes, 86% annualized gain.
There’s really no need to post the annualized gain. Yes theoretically I get it, it’s sound. But honestly man, are you going to be doing that same trade, with those same prices everyday of the year? Even on weekends and holidays? Some things are best left in the textbooks.
Txs guys for answers. About the TII example, if you can buy them today at 17.46 and tender them at 18.37 in 3 weeks, there has to be some significant uncertainties with regard to the merger itself. Sorry maybe I should clarify : by arbitrage I meant real “textbook” arbitrage where there are no or hardly any uncertainties about earning a profit by entering several trades to profit from mispricing. I guess the most classical theoretical example is when IRP is not respected, where the Forward Price is not in line with the interest rates and Spot price. I’m sure unless you can move huge volumes, have access to the best technology and access to the most competitive wholesale quotes & execution, there is no way you can make a penny on that. Thoughts ?
To answer about TII, there are no uncertainties, Carlos Slim owns enough shares of TII to make the tender successful, and he has said he is tendering his shares. I have no idea why opportunities like this exist, I don’t sit and ponder them all day that’s for academics to do. Take the money and run.
Viceroy- I’m interested in this too, but I have serious doubts that an individual can do it. As a rule, I think that riskless arbitrage exists but… -The profits to be made [percentage-wise] are almost always small [a few cents mispricing, perhaps, on a $5 option or future or whatever] -You need to move very quickly to get them -You need to have tons of capital in the trades in order to make it worthwhile If you’re just talking stuff like merger arbitrage, then yeah, clearly as others have stated, it’s possible. But that is not true “riskless” arbitrage - you’re taking risk that the deal will not go through, or that it’ll take so long to go through that your IRR will not be worth it. The only thing I can think of is maybe some small- and nano-cap stocks or some such, where pricing isn’t as efficient, maybe? But then, through most broker-dealers, your trading costs are going to go up and you may get crap execution. I’d love to hear from someone who has attempted true riskless arb as an individual investor.
supersadface, exactly my thoughts.
Most merger arbitrage isn’t “textbook” arbitrage, with certain returns and no risk associated with it. Correct me if I’m wrong but an exception could be insider trading. If you’re cool with the CFO of a company and he tells you what they are going to offer to buy another firm, you can make that play with almost 100% certainty.
Scrooge, yeah, I suppose that’s true but outside of the realm of what we’re talking about. I think Viceroy is referring to strict textbook arbitrage, i.e. you find securities or derivatives that violate put-call parity or forward/spot rate parity and are temporarily mispriced so as to provide a zero-risk profit, after accounting for trading costs. To raise the difficulty level, we’re asking “Is this even possible on a retail investor level?” i.e. you have a $200K account with some discount broker or something and could still execute these kind of transactions profitably with anything less than once-in-a-very-very-long-while frequency. My gut feeling is no. As a rule, retail investors are not just looking at the fact that they have less of a capital base. They also have higher margin rates, generally slower access to less complete information
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, and worse execution. Even if all these things are only slightly worse than an institutional investors, that slight difference, compounded at each stage of an arbitrage transaction, is probably more than enough to make profits impossible or impractical.
MERGER ARB IS NOT ARB!!! Not even close! If the price is not trading near the buyout price there is a legit reason – the big boys know something you do not. I’m not saying you made a bad trade but there was some transaction risk you were not aware of. Anyway, I have seen some put call parity violations based off quotes I pull from Factset. Unfortunately, Schwabb is my IRA broker and they have horrid trading costs (high commissions and bad execution) which would eat away the profits (I have done the math on a few potential trades.) I believe there is a sweet spot out there in trades that are too small for institutions but big enough to absorb 9 one way commissions. But the payoff may not be worth it – you have to put a lot of work in to find very small (albeit risk free) profits in terms of value.
Spierce – You think CDSs should be banned but you pursue merger arb? Merger arb is speculation. CDSs are often used for hedging long bond positions