Equity · Global · ETFs · Intraday · Global Free

High-Frequency Arbitrage with ETF Twins

Academic paper

The Microstructure of Arbitrage: ETF Evidence

AuthorsBen R. Marshall; Nhut H. Nguyen; Nuttawat Visaltanachoti

Institute

NZMassey University
?Massey University - School of Economics and Finance
NZAuckland University of Technology
?Massey University - Department of Economics and Finance

Paper linkhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1709599

Strategy in a nutshell

Exploit SPY–IUSA ETF price divergences >0.2% via cross-exchange arbitrage; buy undervalued, short overvalued ETFs, closing trades when spreads converge.

Economic rationale

ETF prices occasionally deviate from underlying indices due to misweighting, creating temporary arbitrage opportunities that allow investors to capture risk-free profits.

Backtest performance

Annualised return28.91%

Volatility14.69%

Beta-0.002

Sharpe ratio1.7

Win rate40%

Full Python code

1from AlgorithmImports import *
2from typing import List, Union
3# endregion
4class HighFrequencyArbitragewithETFTwins(QCAlgorithm):
5def Initialize(self):
6self.SetStartDate(2000, 1, 1)
7self.SetCash(100000)
8self.spread_threshold:float = 1.002
9self.spy_voo_ratio:Union[None, float] = None
10self.voo_spy_ratio:Union[None, float] = None
11self.symbols:List[Symbol] = [self.AddEquity(x, Resolution.Minute).Symbol for x in ['SPY', 'VOO']]
12self.trade_direction_flag:Union[None, bool] = None
13def OnData(self, data: Slice) -> None:
14if self.symbols[0] in data and data[self.symbols[0]] and self.symbols[1] in data and data[self.symbols[1]]:
15    # get ratio of etfs
16    if self.Time.hour == 9 and self.Time.minute == 35:
17        self.spy_voo_ratio = self.Securities[self.symbols[0]].BidPrice / self.Securities[self.symbols[1]].AskPrice
18        self.voo_spy_ratio = self.Securities[self.symbols[1]].BidPrice / self.Securities[self.symbols[0]].AskPrice
19    if self.spy_voo_ratio is not None and self.voo_spy_ratio is not None and not self.Portfolio.Invested:
20        # decide on trading direction
21        self.trade_direction_flag = True \
22            if (self.Securities[self.symbols[0]].BidPrice / self.Securities[self.symbols[1]].AskPrice) >= self.spy_voo_ratio * self.spread_threshold \
23            else False \
24            if (self.Securities[self.symbols[1]].BidPrice / self.Securities[self.symbols[0]].AskPrice) >= self.voo_spy_ratio * self.spread_threshold \
25            else None
26    
27        # trade execution
28        if self.trade_direction_flag is not None:
29            self.SetHoldings(self.symbols[0], (-1 if self.trade_direction_flag else 1) * 1)
30            self.SetHoldings(self.symbols[1], (-1 if self.trade_direction_flag else 1) * -1)
31    # closing trade
32    if self.Portfolio.Invested:
33        if self.trade_direction_flag:
34            if (self.Securities[self.symbols[0]].BidPrice / self.Securities[self.symbols[1]].AskPrice) < self.spy_voo_ratio * self.spread_threshold:
35                self.Liquidate()
36                self.trade_direction_flag = None
37                self.spy_voo_ratio = None
38                self.voo_spy_ratio = None
39        
40        else:
41            if (self.Securities[self.symbols[1]].BidPrice / self.Securities[self.symbols[0]].AskPrice) < self.voo_spy_ratio * self.spread_threshold:
42                self.Liquidate()
43                self.trade_direction_flag = None
44                self.spy_voo_ratio = None
45                self.voo_spy_ratio = None
46# close before market close
47if self.Time.hour == 15 and self.Time.minute == 59 and self.Portfolio.Invested:
48    self.Liquidate()
49    self.trade_direction_flag = None
50    self.spy_voo_ratio = None
51    self.voo_spy_ratio = None