Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

What is Event Driven Arbitrage?

3 min read

During a major economic announcement, such as the release of a central bank policy statement or an annual budget announcement, traders and investors may look for opportunities to profit from discrepancies in prices across different markets or securities. This is known as event-driven arbitrage.

Event-driven arbitrage is a type of trading strategy that involves identifying and exploiting discrepancies in prices across different markets or securities. The goal of event-driven arbitrage is to take advantage of temporary inefficiencies in the market and to profit from the difference between the prices of the securities being traded.

An example of event-driven arbitrage might involve a trader who notices that the price of a particular security is significantly higher on one exchange than it is on another exchange. The trader might buy the security on the exchange where it is cheaper, and then sell it on the exchange where it is more expensive, in order to profit from the price difference. This type of arbitrage opportunity can arise due to a variety of factors, including discrepancies in supply and demand, differences in the liquidity of the markets, or the impact of market events or news.

Event-driven arbitrage strategies can be used in a variety of different market conditions and can involve trading a wide range of securities, including stocks, bonds, currencies, and commodities.

Event-driven arbitrage is typically pursued by professional traders, including hedge fund managers, proprietary trading firms, and investment banks. These traders may use event-driven arbitrage as part of a larger trading strategy, or they may focus exclusively on this type of trading.

Event-driven arbitrage can also be pursued by individual investors, although it requires a high level of market knowledge and a willingness to take on risk. This type of trading typically involves a high level of technical analysis, as well as the ability to identify and react quickly to market events or news. It can also involve a significant amount of capital, as traders may need to buy and sell large quantities of securities in order to profit from small price discrepancies.

HFT and Event Arbitrage

High-frequency trading (HFT) refers to the use of advanced computer algorithms to trade securities at extremely high speeds. HFT firms often use event-driven arbitrage strategies, as these strategies can be implemented quickly and efficiently using advanced computer systems.

In event-driven arbitrage using HFT, traders might use algorithms to identify discrepancies in prices across different markets or securities in real-time. They can then execute trades at high speeds in order to take advantage of these discrepancies before they disappear. HFT firms may also use their advanced computer systems to monitor market events or news, and to react to these events by executing trades based on predetermined strategies.

One potential advantage of using HFT for event-driven arbitrage is the ability to react quickly to market conditions and to execute trades at a high speed. This can allow traders to profit from temporary inefficiencies in the market that might be missed by slower-moving traders. However, HFT also carries some risks, including the potential for large losses if the market moves against a trader’s position and the potential for negative impacts on market liquidity and stability.

Types of Event Driven Arbitrage

Merger arbitrage: This strategy involves buying the stock of a company that is being acquired and shorting the stock of the acquiring company. The goal is to profit from the difference between the acquisition price and the market price of the target company’s stock.

Risk arbitrage: This strategy involves taking a position in a company that is facing some kind of risk, such as the risk of bankruptcy or the risk of a regulatory change. The goal is to profit from the mispricing that occurs due to the perceived risk.

Activist arbitrage: This strategy involves taking a position in a company that is being targeted by an activist investor. The goal is to profit from the mispricing that occurs due to the activist’s involvement.

Convertible arbitrage: This strategy involves taking a long position in a convertible bond and a short position in the underlying stock. The goal is to profit from the mispricing that can occur between the convertible bond and the stock.

Things to consider while implementing event-driven trading strategies

Identifying and monitoring relevant events: It’s important to identify and monitor the events that can impact your trades. This might include economic indicators, earnings reports, regulatory announcements, and more.

Establishing a trigger: You’ll need to establish a trigger that indicates when to enter or exit a trade based on the event you are monitoring. This could be a specific price level, a change in market conditions, or some other signal.

Managing risk: As with any trading strategy, it’s important to manage risk carefully. This might involve setting stop-loss orders or using other risk management techniques.

Implementing trade execution: You’ll need to have a plan in place for executing trades quickly and efficiently when an event occurs. This might involve using automated trading systems or working with a broker to execute trades.

Monitoring and adapting: It’s important to continuously monitor your trades and adapt your strategy as necessary. This might involve adjusting your triggers or changing the way you manage risk.

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

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