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Originally Posted by paul2657
Nonpiker, thankyou for your reply.
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NP as usual is right about the calculation. In terms of 'lots', it all depends on the definition of a 'lot' at a given booky. Is it $100k equivalent, regardless of the currency pair involved, or is it 100,000 of whatever the base currency is?
If it's in $ equivalent then of course you can easily create a true arb situation, while if it's in base currency terms it is harder (or even imposible depending on how finely you can control your trading size.
Incidentally this isn't a problem confined to the retail trading field. arbers run into this all the time as EBS, for example, allows one to trade in a minimum size of 1 million of base currency, so EUR 1M vs USD or CHF, but USD 1M vs CHF (USD vs EUR quoted the inverse way round does not attract any bids and offers on these systems). So a spot desk arber will constantly in theory be attracting little balances here and there. In practice though, these can be mitigated in a number of ways.
1) Not all three sides of the triangular arb are always executed on a screen based system. Sometimes a customer trade forms part of the arb (and is therefore not necessarily going to be in a round amount).
2) Also sometimes the trader will clear a position either via a voice broker or via a direct call to another bank. In each of these two cases the option is there to do a non round amount if it helps square the book.
3) Or they can simply take a view and run the small amount of risk until such time as it amounts to a market amount and then lob it out on D-2 or EBS as appropriate.
4) Or if they have a 'B desk' / 'Metro desk' or similar (i.e. a desk dealing entirely with the smaller stuff) they can clear it there (although not all banks have this type of setup).
5) Or some banks even have the single bank platform of another (usually larger) bank to use for a variety of situations. Squaring small amounts on these tools is easy.
GJ
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