Statistical Arbitrage

Podcast Duration: 05:52

Hi friends and welcome to this podcast by Angel Broking.

Do you like gadgets? Whether you love gadgets or just appreciate a fast phone that doesn’t lag, in dono mein ek cheez common hai - technology. But why are we talking about technology? Aren't we discussing stock markets?

Doston aaj hum ek aisi arbitrage trading strategy ke baare mein baate karne waale hain, jisme latest technology ka use hota hai. Is strategy ko high frequency algorithmic trading mein use kiya jaata hai. Isko bolte hain statistical arbitrage. Toh is strategy ko samajhne se pehle kuch common terms clarify kar lete hain.

Doston aap arbitrage to samajhte ho na? Isme simple kisi security ya pairs of securities ke beech ke price differences ko exploit karke traders profit banate hain. Simple, right? Jaise ek market mein apples ke rates 120 hain aur doosre mein 150 - same concept ko stock market ke repect mein imagine kariye.

And we mentioned high frequency trading, or HFT - isme computers ke through exchanges par thousands of transactions place kiye jaate hain seconds aur milliseconds ke andar. Itne transactions insaan toh execute nahi kar sakte haina? Isliye, HFT mein algorithms ka use kiya jaata hai. Ye algorithms market ki tested strategies ko automatically software ke zariye execute karti hain.

Cool, haina?

Toh now, let’s discuss statistical arbitrage. Isko commonly stat arb bhi bolte hain. Statistical arbitrage ko mathematically samajhna toh thoda difficult hai, even for experienced investors. Kyunki statistical arbitrage jaisi strategies ko market mein actually execute karne software engineers, mathematicians, stock market specialists, network engineers aur kai doosre domains ka knowledge use hota hai.

Toh what's so cool about putting so much effort?

Ek easy entry point se samajhne ki koshish karte hain. Stay with me on this friends.

Statistical arbitrage basically mean reversion analyses aur diversification ke concepts par based hai. Diversification toh aap samajhte hi ho - kai tarah ke securities ko portfolio mein include karne ko diversification bolte hain. Lekin what if you hold these securities only for a few seconds? Statistical arbitrage does exactly that, lekin isme diversification ka concept thoda differently use hota hai.

Ek example dekhkar samjhte hain, ki statistical arbitrage mein small scale par kya hota hai.

Maan lijiye ki do cold drink companies ke stock prices ek doosre se correlated hain. Iska matlab ye, ki jab ek ki prices fall hoti hain, toh doosre stock ki bhi prices fall hoti hain. And vice-versa. Kabhi kabhi prices correlated directions mein move nahi hoti, aur opposite directions mein move ho jaati hain. Aise case mein investors ye identify karte hain, ki kaunsi security undervalued hai, aur kaunsi overvalued. Jo overvalued hai usme short position create karenge, and the one which is undervalued, usme long position. Prices converge hone par both trades should result in a profit. Isko pair trading bhi bolte hain.

Ab ye consider kariye ki market mein aisi kitni securities hain, whose prices are correlated. Kabhi kabhi different industries ke stocks bhi correlated ho sakte hain. Ek motorcycle company se lekar ek financial company - dono ke prices saath move kar sakte hain.

Basically, ye identify kar paana ki kitne securities correlated hain, requires the use of machine learning algorithms. In securities ke short lived price differences ko exploit kiya jaata hai statistical arbitrage strategy mein. Isme ek pair ke movements ki jagah thousands of correlations ko dekhte hue trades lace kiye jaate hain.

Now look at the interesting bit here. Statistical arbitrage mein long term positions ka use nahi hota. In fact, buying aur selling seconds ke intervals mein hoti hai. Ye isliye, kyunki long term positions mein risk factors ko program karke capture kar paana easy nahi hota hai. Iska matlab ye, ki trade profitable banane ke liye bade transactions place karna padte hain. Aise situations mein agar mean reversal nahi hota hai, toh these big positions can become problematic. And yes friends - this means ki statistical arbitrage trading risky bhi hota hai. Lekin risk ko reduce karne ke liye options ka use bhi kiya jaa sakta hai. You know kaise, right?

Basically, options se aap kisi security ko future mein ek agreed price par buy ya sell kar sakte ho. Agar price reversals hote hain, toh aap simply apne option ko exercise nahi karoge. Lekin agar reversals nahi hote, toh aap strike price par safely exit kar sakte ho.

Options are only one way of reducing risk in statistical arbitrage. Risk reduction ke aur bhi tareeke hote hain. Lekin inko samajhne ke liye kai technical concepts samajhna zaroori hota hai, jaise transaction ki execution speed, exchange par transactions kaise process hote hain, machine ki processing ke delays, etc.

Toh kya iska matlab ye hai ki statistical arbitrage common investors ke liye nahi hai? That is correct to a large extent. Lekin iska importance samajhna zaroori hai. US mein, for example, 2008 ke baad se aadhe se zyada transaction volume high frequency trading se originate hoti hai. Market par iske alag alag tarah se effects dekhne ko mil sakte hain. As an investor, it is important to know these, aur isse aapki trade kaise affect hoti hai.

Did you enjoy this journey through the world of trading with technology?

Aur jaanne ke liye don’t forget to read more about HFT and statistical arbitrage on www.angelbroking.com.

Doston aaj ke podcast mein bas itna hi. Milte hain next time - tab tak ke liye, goodbye from angel broking, and happy investing!