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Most brokers compute rollover once a day (2200 GMT), but OANDA calculates it continuously.

I thought I'd cleverly found an arbitrage opportunity, but it turns out OANDA knows about this and advertises it. Quoting from http://www.oanda.com/corp/story/innovations

 Professional traders can exploit this flexibility by arbitraging the 
 continuous and discrete interest-calculation scenarios through two 
 trading lines--one with an established player, such as Citibank or 
 UBS, and the other with OANDA. Whenever they sell a 
 high-interest-rate currency (such as South African Rand) they can do 
 so with the traditional player, where they will pay no intra-day 
 interest for shorting that currency. On the other hand, they can 
 always buy a high-interest-rate currency through OANDA, where they 
 earn the "carry" (interest-rate differential) for the position, 
 however briefly they may hold it. 

Has anyone done this? I realize the bid/ask spread on both sides would have to be small, but this still seems viable?

My form of arbitrage is slightly different: hold a high-interest position w/ a regular broker for 1 minute on each side of rollover time, just to get the rollover (for the entire 24 hour period). Take the opposite position w/ OANDA. You'll pay rollover, but for only 2 minutes.

EDIT: Apologies, I never got around to test this. Has anyone else had a chance? I realize oanda.com's higher spreads (which are non-negotiable) may cover the arbitrage.

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Transaction costs are indeed the barrier to most forms of arbitrage. Have you backtested your strategy with historical data? –  chrisaycock Mar 13 '11 at 17:22
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@chrisaycock Nope. I plan to "forward test" in about 3h35m10s... Backtesting may be difficult since different brokers have different bid/ask spreads and different rollover rates. I'm not sure how much historical data they keep on either. –  barrycarter Mar 13 '11 at 17:25
    
how did it end up going? –  emaster70 Aug 2 '11 at 8:36
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3 Answers

There are several things you need to consider.

  • You need to use a large leverage to make it work, some brokers reduce the amount they pay in this case.
  • If you use a leverage, there is substantial risk that one side of your trade cannot withstand the fluctuation of the market. So, your balance on one side will turn below required margin at some point and you need to deposit money using the profit you earned from another account. And there is transaction cost which is not a small amount because the cost applies to all of your earned money. Say, you invest 10,000 dollars and use 50:1 leverage, then you lose all your money at one account, you need to withdraw the profit from one broker which is more than 9,000 dollars and move it to the other broker. The cost could be several percent and you need to do it multiple times a year unless you have a low leverage which you would not choose at first place. Or you have a way to eliminate all or most cost associated with transferring funds from one broker to the other (You will also lose some days transferring money). When you do transfer, you need to close both trades and pay spreads. It's a lot of money.
  • The difference is not enough for you to be profitable at all on oanda since Oanda doesn't have a low interest. It is just rolling over time.
  • You might want to try some small brokers that pays much. But usually a higher interest pay is associated with a higher spread. And the small brokers you invest is not secure for you money. If you are really interested, you can try InstaFX. This is a company with no regulation. But it pays well on some currency pairs like GBPAUD. But again don't forget about spread and this type of company sometimes have commission. (Yes, commission plus spread)
  • Overall, it's probably not a very good idea to do so and not a long-lasting one. If you can make money this easy, OANDA would have lost a lot of money paying interest and changed their interest policy. They can change their interest rate at no time.
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OANDA's quotes are set by OANDA, not by the market. They deliberately skew their quotes towards whichever side they would like to be on. In your example, if as a result of traders like you OANDA has accumulated a net long position in a high yielding currency just before the official rollover time, they will set their quotes a bit higher than the true market in order to encourage selling. After the rollover time, they will set their quotes a bit lower in order to encourage buying while you and other trades like you are selling. The closed nature of OANDA's platform (no possibility to move your positions to another broker) make it very unlikely that this sort of strategy will work in practice. Even if it does, I am confident you will be benefiting at the expense of other OANDA traders, not at the expense of OANDA itself. In any case, it is unlikely that yields will be high enough to offset the typically very wide bid/ask spreads at rollover time.

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How did your test of arbitraging Oanda's continuous interest versus other FX broker's rollover go? I ran a similar test before and found it did not overcome the spread costs, although starting on Wednesday (triple pay day) helped, the weekend interest at Oanda would catch up.

There are other ways of trading this arbitrage. You can average into a leveraged interest positive position at Oanda, and then open a hedging position at another broker after the rollover. However, that is essentially no different than conducting a straight retail trade but with the added risk of carrying potentially large positions in multiple brokers.

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