Risk Free Arbitrage with Spread Betting?

Credit to Peter Marsden

I noticed a while ago spread betting companies let you buy and sell currency pairs and many of them allow you to select which currency you want to use for each pip value. For example if you open a long position in GBP/USD pip values with a normal broker would be in USD. With many spread betting firms you can have pips in GBP.

Assuming I am fully understanding everything, this theoretically creates a 'risk free' arbitrage opportunity.

Forex Spread Betting Trading System

Let me explain:

Say at this point in time, GBP/USD is $2.

If you sold 100k GBP/USD with a normal broker and bought GBP/USD with a spread betting company for £5 per pip, no matter which way the market moved, you would have profited.

If price moves to 1.85 in the next few months, the short GBP/USD position with the normal broker would be +$15000 [(2-1.85)*100,000]. The long spread betting position would be £-7500 [15*5].

If we look at both positions in Pound terms we have this:

GBP/USD long £-75.00.

GBP/USD short $15000/1.85 (the rate at the time) = +£81.08.

This would result in a profit of £6.08.

Now let's see what happens if price moved to 2.15 instead:

The long would be +£7500 [15*5].

The short would be -$15000 [(2.15-2)*100,000].

Let's convert both positions into Pounds:

We have +£75.00 and -$15000/2.15= £69.76.

This would result in a profit of £5.24.

So as you can see, no matter which direction the forex pair goes, you stand to gain. These calculations do not factor in the spreads.etc. I don't believe any FX strategy is 100% risk free - brokers slip orders especially during the news.etc.

I have used this strategy for a few months on the GBP/JPY with some great results.

The further price moves from the starting point, the greater the profit. It was excellent last July when GBP/JPY dropped massively.

To make this strategy work you need -:

  1. You must have a reputable forex broker allowing GBP Account to make this work.
  2. A spread betting broker with GBP account.
  3. Bank account in GBP.

The arbitrage opportunity arises because with spread betting you often get the opportunity to open a trade and have the pip values in the base currency (the first currency in a pair). All retail FX brokers have the pip values priced in the quote currency (the second currency in a pair). For example if you open a 100k GBP/USD position, the pip values will be $10 per pip. With spread betting you have the opportunity to have the pip values in GBP. Unlike retail FX with spread betting you don't open a set position size, you just select how much you would like to bet per pip movement. For example if you wanted to bet £5 per pip movement and the market moved 200 pips in your favor, you would have a floating position of +£1000. Margin requirements vary between brokers, but some only require margin for the maximum potential loss.

Notes and Observations on the UK Pound Financial Spread Betting Strategy-:

  1. This method can be used for any GBP denominated pair as long as the spread bet side is long.
  2. Long and bigger movements would yield bigger results. I try and keep the positions open as long as possible, then re-balance both sides. If I have spare cash lying around I sometimes add funds to keep the positions open whilst re-balancing. Credit cards can be good for this, as they often give you a few weeks interest free and it in theory completely risk free.
  3. Can you close the position quick enough at the spread betting broker? - My simple answer would be yes as long you don't try and close in the middle of the NFP.
  4. This method is interesting as here it doesn't really matter to you if the spread bet side wins or loses as the other side covers it. Note that the spread bet side must be the long position. If it's the short position it will have the opposite effect, i.e. both sides will lose. Also, play around with the spread bet price per pip, so you get the best result. Try and keep the positions open as long as possible, then re-balance both sides.
  5. For a spread betting broker I use City Index. For the standard broker I use CMSFX. IG Index do 50 pence per pip, but at 8.00pm rolling over your trade to the next day will cost you pips. CityIndex on the other hand work like a normal retail FX broker. They pay/charge swap depending on the interest rate differentials. If you are long on GBP/JPY you earn 3.2 pips per day which is better than a lot of retail brokers.
  6. Suppose you short at 240 with CMSFX and you don't get 240 at the same time when you go long with CityIndex but you have to pay 240,10. You can overcome this spread loss of 10 pips by adapting the pound/pip value at the spread betting company.

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