Is it possible to do high frequency arbitrage with stock and its futures? If I see a gap in bid/ask of a stock where bid /ask is smaller in stock but larger in futures. Can I execute two trades and make the difference. And I do this as often as possible like every minute or something.
I am assuming there wouldn’t be any margin requirements for this trade since I am selling the future of a stock that I own.
Is this a good strategy? Or would zerodha still lock the margin preventing me to execute this trade on high frequency basis.
Arbitrage trades have zero risk! I am not betting on the direction of the stock. Would zerodha hold my margin if I sell futures contract while holding equivalent amount of stock in my portfolio. And I might be taking these trades very often, like in min to 5min intervals.
I m not an expert , but have spent enough time. So here goes.
The answer you are looking for is a big NO!!!.
The gap that you are looking at is very very small in arbitrage, retail simply cannot make money in this gap.
There are arbitrage funds, they do this all the time and they are struggling to make decent returns.
No only the gap, think about the brokerage and taxes . They will surely eat into your profits significantly to make it not worth while even if you are able to somehow exploit the gap.
So yes it possible to do arbitrage , but gap closes quickly and brokerage/taxes make it NOT worthwhile for retail traders.
if you still don’t believe me , paper trade it and see for yourself.
If the bid in futures is greater than the ask in cash then I would buy the stock and sell the future. This I would repeat every time the gap is profitable. But If you look at the margin requirement it can’t be done on a high frequency basis. But technically since this is a arbitrage position the margin requirements should be zero.
Ok. You can not do high frequency (several trades in a few minutes) by trying to arbitrage between future price and cash price. Both prices behave differently most of the time
bye
Firstly high frequency trading is today referenced to where large number of orders are executed at very fast speeds. And in the HFT world, today the speeds are usually in micro seconds. (0.000001 of second) These speeds are not possible unless your program/algo sits on the exchange collocation. Which means your server sits within the exchange and is connected on LAN. The cost of being on the colo is upwards of Rs 5 to Rs 8lks per year.
You can pledge the stock you own and get margin using which you can trade Futures. Check this
So yeah, you can do this, but this business is like a war of machines. Only the fastest ones make money. Today most of this simple stock-future arbitrage strategies have moved to FPGA, so unless you have a way to be faster than everyone else, no point trying this.