available to receive and centralize orders. Without anyelectronic system, index arbitrage is extremely dif®cult and risky toimplement because an arbitrageur needs to buy all the index constituents one by one. Furthermore, in a dealer market transactions typically take place over the phone, which makes the whole processunpractical to say the least. In that context, the introduction of anall-electronic marketplace has provided arbitrageurs with a muchfriendlier environment, in turn facilitating their job considerably. Toa large extent, the U.K. basis mirrors this evolution of the market.Prior to October 1997 the basis shows wide swings, whereas after ashort adaptation period toward the end of 1997, it evolves into amuch narrower range.As far as the direction of the market is concerned, the basis seemsto have little correlation with the overall market, showing here a market closer to the United States than Japan in nature. Beyond theseobservations, the U.K. market is in fact interesting primarily as anillustration of the impact of modern trading technology on overallef®ciency. Even if making de®nitive conclusions is probably far-fetchedjust by looking at one single chart, there cannot be any doubt thatinvestors in general bene®ted largely from the introduction of an electronic and automated order-execution system, and arbitrageurs as welleven if that meant more competition. This raises the interesting question of whether the United States, for example, would not bene®t froma similar move, away from the Nasdaq dealer market.GermanyGermany is, along with France, the most intriguing situation here.Figure 8-6 shows a number of regular crevasses resulting from theparticularities in taxes and dividends. To understand why this is so,consider an index valued at $100, with a gross dividend yield of 2
CHAPTER 8 INDEX ARBITRAGE
383
percent and a corporate tax rate on dividends at 30 percent. For simplicity, assume that all the dividends are paid on the same ex-date.10An off-shore investor will be subject to the 30 percent tax, so willreceive a net amount of $1.4 (= $100  2 percent  70 percent). If thisinvestorÐwhom we denote IO Ðis pricing a futures on this indexbefore the ex-date with two months left until expiry and a rate of 4percent, the fair value is:boff-shore  $100  2  4 percent=12
$1:4 
$0:73
Now consider a domestic investorÐID Ðaccredited to claim a taxrebate for the entire amount of tax, $0.6. This investor sees a fairvalue at:bdomestic  $100  2  4 percent=12
$2 
$1:33
In other words, if the future is currently trading at $99, IO sees a marketbasis of ($99 $100$0:73  $0:27, while ID sees ($99 $100$1:33  $0:33. Because the market basis is negative, IO has an interest to sell his or her position, while ID , on the other hand, has aninterest to build one. This difference in market parameter has beendescribed before, but what is interesting here is the practical consequence: The tax rebate creates an economic incentive for off-shoreinvestors to sell their position to domestic ones. Intuitively this resultmakes a lot of sense because domestic investors are tax advantagedand have a strong interest in holding stocks.Now let's consider one more dimension and allow IO and ID toenter a stock loan. If the tax rebate is priced at 50 percent in the transaction, IO will lend his shares to ID and receive 50 percent of the rebateon the ex-date. In practice, ID acquires IO 's entire position just beforethe ex-date, claims the tax rebate due to his holding on the ex-date, andpays back 50 percentÐthat is, $0.3 to IO at the expiry of the stock loan.Under these assumptions, let's revisit the fair value of each investor:2  4 percent$1:4  $0:3  $1:03boff shore  $100 12because IO receives $0.3 more than before in dividends, and:2  4 percent$2 $0:3  $1:03bdomestic  $100 1210
For simplicity as well we compute a standard cash-and-carry futures, although theDAX is a total return index. The actual calculation is slightly more complex but theconclusion is exactly the same.
384
COMMON ARBITRAGE SITUATIONS
because ID has to pay $0.3 back to IO . Both investors see now an equalfair value, and accordingly with a future at $99, will see a ($99 $100)± ( $1.03) = $0.03 market basis. There is no more incentive to transferstocks from one investor to the other in that environment.This simple example illustrates perfectly the mechanic of the taxrebate and its impact on the fair value of distinct market participants. Itis directly relevant to our original discussion because it helps understand the curious shape of the market basis in Germany. If we price thefair value with net dividends, a domestic investor will have an incentive to sell futures aggressively around the ex-date because he or shereceives more than net dividends with the tax rebate. Therefore, to usthe basis will appear sharply negative while for him or her, it willprobably be fairly priced, which is exactly what is visible in Figure8-6 considering that dividends are highly concentrated in the secondquarter of the year in Germany.11In fact, we can take a step further and even make quantitativeconclusions. A domestic investor will sell futures as long as theexpected tax rebate on borrowed stocks is higher than the expectedrebate payment to the lender.12 In Figure 8-6, the ®rst valley in Marchthrough April 1995 is close to 0.50 percent deep, which is exactly thedividend advantage adjusted for the market-wide price of the rebatethrough stock loans. Assuming this pricing was close to 50 percent atthat time, the total rebate bene®t to stock borrowers was close to 1percent (= 0.50 percent/50 percent). If we assume a tax rate of 30percent, the total dividend yield at that time can be estimated at 3percent (= 1 percent/30 percent).13A second interesting observation from the chart is the decreasingamplitude of the ``dividend valley.'' This is a result of a relative depreciation of the dividend yield because nominal dividends grew moreslowly than the overall market. Indeed, in 1999, if we assumed dividends equal to those of 1995, a tax rebate of 50 percent, and a tax
11
It would be tempting to conclude that the basis is negative because domestic investors are aggressively selling futures and have a natural control of their domesticmarket. This is not true: The negative basis is not the result of more aggressiveallocation or easier availability of capital between domestic and off-shore investors.It is simply the equilibrium state of the market in the presence of ®scal arbitrage,which means that actions of all rational investors alike contribute to this equilibrium.12Technically speaking, we should also account for the borrowing fee paid to thelender. In practice, many stock loans entered into for dividend purposes carry noborrowing fee as such; rather, it is embedded in the terms of the tax rebate.13Note that this example is illustrative only, even though its results are reasonable.
CHAPTER 8 INDEX ARBITRAGE
385
bracket of 30 percent, we should have a basis negative by 0.29 percent(= 0.50 percent  2,500/4,250)Ðthat is, half that of 1995Ðto account forthe fact that the market went up from 2,500 to 4,250. Naturally it isimpossible to con®rm this calculation just by looking at Figure 8-6, butinterestingly enough the basis is 0.25 percent in 1999, which is not toofar off.With respect to the overall magnitude of the basis, the market isfairly priced outside the particular deviation due to dividends. Indeed,remove the valley from Figure 8-6, and all that is left is a ¯at linebetween 0:20 percent and 0. Experience con®rms that it is indeeddif®cult to make money in Germany from trading only. There aretwo interesting points, however, in 1997 and 1998. At ®rst glance thenegative basis of fall 1997 and fall 1998 could be assimilated to adividend basis, except that there were no dividends at those times.Those troubled periods correspond to the minicrash of October 1997and to the Russian crisis and show clearly that the basis was reactive tothe overall environment, even if this reactivity does not really materialize anywhere else in the entire ®ve-year period.Finally, it is worth mentioning that the basis in Germany is consistently negative outside dividend periods, which essentially meansthat index arbitrageurs are short, on average. The distinction ``on average'' is important because we see only close-to-close data, and it mayvery well be that the basis during the day offers opportunities to golong. In fact, it is true that arbitrageurs tend to be short in practice, withthe associated complication of having to secure stock regularly frompotential lenders. It may seem paradoxical to associate a market thatprovides an apparently strong economic incentive to go short withsigni®cant opportunities for stock holders during dividend periods,but in fact, both properties are one and the same. It is exactly becausethe entire market is eager to go long that futures tend to trade systematically at a discount because holding a position against a futures contract is the only way to eliminate the market risk while enjoying thebene®ts of holding the stocks. In other words, the futures contract isunder consistent selling pressure from participants who are trying tomaintain a stock inventory without carrying too much risk.Clearly, the German market cannot be understood or traded without a prior understanding of dividends and the opportunities that existbecause of them. These are in fact primarily available to domesticinvestors; therefore it has been necessary for foreignÐand notablyU.S.Ðsecurities ®rms to open subsidiaries there, and most of themhave done so. This is an example of the structural competitive convergence we mentioned very early. Opening a domestic branch to bene®t
386
COMMON ARBITRAGE SITUATIONS
fully from market opportunities is a requirement, but all it accomplishes is to put all domestic competitors on equal footing withoutproviding any further advantage.FranceWith France we encounter a situation similar to that of Germany withrespect to dividends. The same basis effect is visible around the secondquarter of each year because dividends are also concentrated aroundthat period. Indeed, the basis in France seems to be very similar to thatin Germany, and the same cause having the same effects, clear opportunities exist to enter ®scal arbitrage. Outside dividends, pure tradingis again dif®cult and largely on the short side, although the magnitudeof the basis seems to be slightly higher than that on the DAX.France has a particularity, however, because of its settlement system. Futures are rolling monthly, even if quarterly expiries are by farmost liquid.14 With a monthly settlement, index arbitrageurs do nothave any ®nancing to pay if they enter a position against the nearestfutures. At the end of each month they can theoretically unwind theirposition without any ®nancing expense. In practice, this operatingmode is not as trivial because the future expires on an average, so itmay very well be that a known ®nancing charge to carry the positioninto the following month is better than an unknown execution risk onexpiry.
Pro®tability
Pro®tability of index arbitrage is a particularly critical question. If itwere highly pro®table, we would indeed have identi®ed a true moneymachine. In reality, it is not extraordinarily so, which explains whyonly few professionals really practice it as a stand-alone pro®t center.15
14
This particular statement means that the chart for France should be interpreted morecautiously. It represents the market basis with respect to the nearest futures contract,which is not always the most liquid when it is not a quarterly expiry. Drawingconclusions about trading opportunities is then trickier because of frequent rolloverbetween maturities.15This point is extremely important. As we mentioned earlier with respect to Germany,index arbitrage is the best way to accumulate an inventory of stocks without carryingthe market risk. Reasons for holding an inventory are diverse; dividends are certainlyone but there are many others, like the ability to price requests from customers onparticular stocks or sets of stocks. Generally speaking, inventory holders differ frompure arbitrageurs because their target is accumulation, so they may not be as aggressive, particularly on the selling side.
CHAPTER 8 INDEX ARBITRAGE
387
In fact, assessing real pro®tability is a challenge for an indexarbitrage position because of the dif®culty in tracking all parameters.Actual realized gains would be ideal, but these are highly proprietary®gures in general. An alternative is to track gains from market data,trying, for example, to reconstitute opportunities as they appear inthe marketplace. This method leads to interesting results, but it isextremely tedious because of the dif®culty in tracking exact transaction data for a large number of stocks. When applied to the S&P 500,for example, this approach requires time-and-sales data for all constituents and for the futures, trying to compute the market basis as anarbitrageur would see it. From there, once an opportunity is identi®ed, trades must be simulated as if effected in real time for eachindividual stock, and only then is it possible to extract a total pro®testimate.Despite the dif®culty, this exercise has been carried out relativelyfrequently in the academic sphere, at a time when program trading,and particularly index arbitrage, were under a lot of scrutiny. At theend of the 1980s and beginning of the 1990s, academic research wasfocused on trying to identify the role of these strategies in the 1987debacle and in the 1989 minicrash. Over recent years, however, thesesame questions have receded, and with them the overall assessment ofprogram trading and index arbitrage as viable trading strategies.Therefore, whatever research is available is relatively outdated,although it may be worth a look.16We will attack the question with a very empirical and broad-basedapproach. Because the United Kingdom is probably still undergoingtransition following its adoption of an all electronic marketplace, it isprobably not yet in a steady state with respect to index arbitrage, so wewill leave it aside here. We will also leave France and Germany aside,but for different reasons. We have determined that both markets are``governed'' by dividend and tax issues, which are nontrivial becausethey involve the ability of each individual institution to price, trade,and claim tax rebates. Although there may be relative uniformityamong market participants in that respect, this question is really unrelated to index arbitrage per se. An arbitrage position may be built forthe sole purpose of capturing a ®scal advantage, but we are primarilyconcerned here with trading pro®tability. Therefore, we will reallyfocus on Japan and the United States, and adopt a similar frameworkfor both.
16
For a short bibliography, see the references at the end of the chapter.
388
COMMON ARBITRAGE SITUATIONS
The idea is to look at the best scenario from an arbitrageur's perspective. As we indicated in the section dedicated to index replicatingportfolios, buying a portfolio means that all the constituents have to bepurchased at the same time. The ``best'' scenario on the cash side is tobuy each and every stock on the bid price, without having to pay asmuch as the offer price. Conversely, if we are selling cash, the best caseis to be able to realize the ask price. With respect to the futures, thebest-case scenario is also buying on the bid and selling on the offer.Given this set of assumptions, consider now the practical case ofthe S&P 500. The real-time bid-ask price on the index is usually $2,relatively steady and independent of the market direction. On thefutures, the spread is much more volatile, but in general it is lessthan $0.50. Therefore, the typical market situation can be describedby the diagram in Figure 8-10 where Ilast , Ibid , and Iask denote respectively the index computed with last traded, bid, and ask prices. Flast ,Fbid , and Fask are the last traded, bid, and ask prices for the futures, andbTH and bM are respectively the theoretical and market basis.If Fbid bTH goes above Iask , it becomes possible to lock a pro®t bybuying all the stocks at their ask price, and selling the futures contracton its bid. Conversely, if Fask bTH  Ibid , the opposite opportunitydevelops, and it is possible to sell all the stocks on their bid and buythe futures contract on its offer, locking the difference. Needless to say,these situations are extremely infrequent, and in most cases the following inequalities hold: Fbid bTH  Iask , Fask bTH  Ibid . Therefore, thebest case for an arbitrageur is a situation in which Fbid bTH  Iask orFask bTH  Ibid , and the realized market basis is then between $2 and$2.5. Naturally in reality it is impossible to trade all stocks at the bid oroffer because of execution lags. Therefore, $2 to $2.5 is a very optimistic
FASK - bTHFLAST - bTHbM
IASK
≈ $0.5
FBID - bTHILAST
IBIDFigure 8-10 Bid-Ask Spread
≈ $2
CHAPTER 8 INDEX ARBITRAGE
389
®gure, but it has a high relevance with what is happening in the marketplace. For simplicity, we neglect here transactionÐand clearingÐcosts, which will give us an even more optimistic ®gure.From there we conclude that a typical arbitrage trade yields amaximum of 0.14 to 0.17 percent (= $2=$1,400) with an index at$1,400.17 However, this is not complete because of several additionalelements. First and foremost, the position should be ``turned'' as oftenas possible to ensure that capital is used adequately. Then, arbitrageurscan make money on stock lending, provided that they are long, whichis usually the case in the United States and Japan.18 Finally, they bene®tfrom rolling their position from one expiry to the next, a procedure wewill detail shortly.To account for the turnover, let's consider that there are no morethan a dozen active arbitrageurs on the U.S. market, each with a position limit of $5 billion. This is possibly a high estimate, but it is notunreasonable considering the nature of the industry. Even if there aremore than a dozen active players, what we really care about is the totalamount of capital dedicated to index arbitrage, and $60 billion is agood place to start.19 The NYSE statistics show that on average arbitrage-related trades account for 2.7 percent of the overall volume (June1999 to June 2000). During the same period, the average daily volumewas 912 million shares. If we assume in addition that the S&P 500account for 90 percent of the total arbitrage volume, the daily averagevolume of index arbitrageurs is approximately 22.2 million shares (=912  2.7 percent  90 percent). To tie everything together, take theaverage NYSE stock price at $50. A total amount of $60 billion isthen equivalent to 1.2 billion shares ( 60/50), which means that 2.4billion shares must be traded for the position to ``turn'' entirely.20 At22.2 million shares per day, this turnover requires 108 days. In short,the entire capital dedicated to index arbitrage turns roughly 2.3 times ayear (= 252 / 108), a ®gure we will round to 2.5 for convenience.17
0.14 to 0.17 percent is a pro®t ®gure net of all direct costs except the cost of capital. Itaccounts for the fact that we pay the ®nancing on the stock position because this®nancing is included in the fair value.18Alternatively, they have to pay a borrowing fee if they are short. We primarily focuson the long side here, knowing that this would be again an overstatement if we wereshort.19We consider here primarily arbitrage on the S&P 500 because it is a dominant strategy. Other possible indices include the Dow Jones, S&P 100 with ``synthetic'' futurescreated from options, and the Nasdaq 100 index.20In other words, 2.4 billion shares must be traded for the position to be built andunwound entirely.
390
COMMON ARBITRAGE SITUATIONS
Therefore, a typical arbitrageur will turn the position 2.5 times ayear, making between $4 and $5 for every roundtrip. On a $5 billionpositionÐthat is, 14,285 futures (= $5b / $1,400 / 250)Ðthis amountsto a total pro®t between $35.7 and $44.6 million. If we take $40 millionas an indicative midpoint, the return on invested nominal is 0.8 percent(= $40 / $5,000). We need to include now stock lending opportunitiesand the pro®t from the roll.If the position turns entirely 2.5 times a year, we assume that onaverage it is around $2.5 billion in nominal. Taking the typical fee to beclose to 0.15 percent in the United States, lending the position outconsistently yields an additional $3.75 million. As far as the roll isconcerned, let's consider that it adds $0.25 every quarter, $1 peryearÐthat is, 0.07 percent on an average position of $2.5 billion. Wewill detail and revisit this ®gure shortly.Finally, we need to deduct the cost of capital associated with thesolvency requirements. In the United States listed stocks are consideredrelatively low risk assets and weighted in the calculation at 15 percent.Taking the solvency ratio at 8 percent, and the return to shareholdercapital at 15 percent, the total cost of capital is 0.18 percent (= 15percent  8 percent  15 percent). All together the arbitrage positionyields 0.73 percent (= 0.80 percent + 0.15 percent/2 + 0.07 percent/2 0.18 percent) of the maximum authorized position, $5 billion in ourcase.21By and large, this is a relatively low ®gure, and we know from themany estimations we made it is probably an optimistic ®gure nevertheless. If we perform the same calculation for Japan, we ®nd a slightlyhigher ®gure, close to 0.85 percent. Round-trip pro®t on the Nikkei isprobably closer to 0.90 percent with turnover of twice a year, and theroll has been historically much higher, around 0.20 to 0.30 percent.Stock lending is relatively small, and we will consider it negligible.As far as the cost of capital is concerned, it can be considered equal,which gives a total of 0.85 percent (= 0.90 percent + 0.25 percent/20.18 percent).Despite the obvious approximate nature of these ®gures, it is clearthat index arbitrage is extremely capital intensive for the type ofreturns it provides. In addition, it is available only to institutionswith low-cost funding, low-cost capital, and low transaction costs. Inother words, it is really worth implementing only on a large scale,21
0.15 percent/2 is the P&L from lending the stocks, $5 billion in maximum amount,but $5=2 billion on average. 0.07 percent/2 is the P&L from the rollover on a positionwhich is $5=2 billion on average.
CHAPTER 8 INDEX ARBITRAGE
391
which again explains why so few trading desks are actively practicingit and why in turn we have been so restrictive about the context.
RISKSExecution
As we indicated earlier, execution is an important aspect of risk in anarbitrage strategy, and this is particularly true for index arbitragebecause of the large number of instruments that must be transactedat the same time. In order to analyze that risk, we ®rst present a generalintroduction in the context of a regular market, and we examine nextan exceptional situation that could have resulted in signi®cant losses toarbitrageurs.IntroductionFor an index arbitrage, the execution pattern is relatively simple. Assoon as a trader identi®es an opportunity, he or she tries to capture itby intervening in the market and sending orders simultaneously on thestocks and on the futures. As a result, the market basis tends to narrowbecause the executions on the stock move the last traded prices backwithin nonarbitrage boundaries. Visually, the basis looks like thatshown in Figure 8-11. These charts represent the market basis averagedover a two-year period and 50,760 program trades, centered on thetime at which the arbitrage event was supposed to have takenplace.22 The data are NYSE proprietary data on program trading andindex arbitrage, which means that it is reliable to the extent that reporting institutions follow the reporting guidelines notably with respect toaccurate time-stamping.23 The wave and its amortization are particu-
22
An arbitrage event is de®ned here as the reported time upon which an arbitragetransaction was initiated. The regressions mentioned in the legend are regressionsof the minute-by-minute basis against the total nominal of arbitrage events. They looklike bt  i  xt i  i where bt is the market basis at time t; i ; i ) are the regressioncoef®cients, and xt indicates the nominal of a program trade originated at time t. i isvaried from 5 to 30, giving a total of 36 regressions. The chart plots ( i  i ) for5  i  30. This methodology allows disentangling the effects of different programsinitiated at different times.23As a reminder, the difference in reporting between program trades and index arbitrage is related to the fact that index arbitrage involves an index derivative, futures, oroptions.
392
COMMON ARBITRAGE SITUATIONS
Figure 8-11 Arbitrage EventNote: The basis as it is charted here is the market basis as we de®ned it with oppositeconventions. It is equal to the index price minus the futures market price plus a statistical estimate of the cost of carryÐwhich we know is the theoretical basis. Therefore, abuy opportunity, which corresponds to a positive market basis for us, is charted as anegative value.(Source: Lawrence Harris, George So®anos, and James Shapiro, ``Program Trading andIntraday Volatility,'' Review of Financial Studies, 7, 1994. Reprinted with permission.)
CHAPTER 8 INDEX ARBITRAGE
393
larly visible and show that a real opportunity does not seem to beavailable more than a few minutes.24It is also interesting to look at the number of orders executed in themarket at the time of an index arbitrage or program trade, which isavailable in Figure 8-12. Clearly, arbitrage events lead to larger numbers of orders at the same time, suggesting that arbitrageurs are indeedtrying to execute as many orders as possible as quickly as possible. Itcould be inferred from Figure 8-12 that arbitrageurs have a disproportionate impact on the market in terms of outright direction or volume.In fact, it is not necessarily true because their net impact is zero if theymaintain a nominal hedge in their position. As far as volume is concerned, index arbitrage averaged 2.5 percent of daily NYSE volumeover the past two yearsÐnot exactly a large ®gure.Another interesting remark can be made with respect to Figure8-12: It is apparent and highly intuitive that index arbitrage trades aretriggered by a basis mispricing. However, it is fair to say that nonarbitrage program trading is also somewhat correlated to the same
Figure 8-12 Arbitrage Event Execution(Source: Lawrence Harris, George So®anos, and James Shapiro, ``Program Trading andIntraday Volatility,'' Review of Financial Studies, 7, 1994. Reprinted with permission.)24
Because of the methodology in the study, the y axis does not represent the amplitudeof the basis mispricing. It is therefore not directly comparable to the 0:15 percent weproposed earlier.
394
COMMON ARBITRAGE SITUATIONS
parameter. This particular phenomenon is an illustration of the distinction we made earlier between passive and active arbitrage. Indexarbitrageurs are actively involved in capturing opportunities by trading both legs aggressively as often as possible. Program traders, however, are an example of passive arbitrageurs: They obviously adapttheir execution strategy to the environmentÐthat is, the level of market basis at the time of the tradeÐbut they are not engaging inarbitrage per se because they do not hedge their position with futuresor options. Considering that index arbitrage is around 13 percent oftotal program trading volume on average over the past two years, itis reasonable to conclude that passive arbitrage, in the form of program trading or otherwise, is much more powerful than active indexarbitrage in keeping the market ef®ciently priced.Percentage of ExecutionThe execution of an arbitrage trade requires trading at the same timethe futures and index constituents in proportion to their weighting inthe index. Therefore, execution risk can be considered from two different angles: on one hand, the nonsimultaneity of transactions betweencash and futures, and on the other hand, the nonexecution of somestocks in the portfolio.We will deal with the second possibility in the section dedicatedto correlation because this is really what it is, a correlation exposurebetween the perfect replicating portfolio and the position we actuallyhold. With respect to the nonsimultaneity of transactions betweencash and futures, it is useful to introduce the notion of percentageof execution as the fraction of the overall capitalization executed at agiven time.25 If we denote eS and eF these percentages on stocks andfutures, respectively, the execution risk in an arbitrage event can berepresented by a time diagram similar to the hypothetical example inFigure 8-13. At a given time, there may be a difference in executednominal on both legs, and this difference can be interpreted as theeffective execution risk at that particular moment. As a more dramatic illustration, consider the situation in Figure 8-14. In this particular case, execution on the cash side is lagging behind that on thefutures.26 The reasons behind an execution strategy of that type canbe diverse, but it is usually meant to capture an anticipated move in2526
All orders not already executed are said to be ``working orders.''This practice is generally referred to as leggingÐthat is, the execution of the two legsat different paces.
CHAPTER 8 INDEX ARBITRAGE
395
Time Diagram: Percentage of Execution
100%80%60%40%20%
Stocks
Futures
0%0
1
2
3
4
5
6
7
8
9
10
Time (arbitrary unit)
Figure 8-13
Percentage of Execution
the market. For example, if the above arbitrage is a buy trade, thearbitrageur is selling futures more aggressively than cash, hoping tobuy cash a few minutes later at a lower price. Alternatively, if it is asell trade, then the arbitrageur is buying futures in anticipation of amove up that would allow him or her to sell cash higher.Regardless of the direction of the trade, during the ®rst sevenminutes of the arbitrage, the position is at risk from an unf