ADR Arb/Spread

[knocks420 10]

A buddy of mine asked for some help investigating an ADR trading strategy based on results of another trader making good money. Knowing these traders I can't imagine a sophisticated quantitative arbitrage model or conversion process but more likely following serial correlation or some other such simple strategy. Just wanted to throw it out there to see if anyone has heard about this approach or had any ideas? Thanks!

[Frank 10]

I happened to speak to a guy at a cocktail party who does this for a living. He was at Susquehanna for a long time in the derivatives group and left with a few others a few years ago to go their own --- they were using 75x leverage to do ADR arbitrage (currency hedging is a part of it).

 

I would think this is very difficult to pull off unless you are very experienced at this type of thing and/or have some type of technology advantage.

[knocks420 10]

I happened to speak to a guy at a cocktail party who does this for a living. He was at Susquehanna for a long time in the derivatives group and left with a few others a few years ago to go their own --- they were using 75x leverage to do ADR arbitrage (currency hedging is a part of it).

 

I would think this is very difficult to pull off unless you are very experienced at this type of thing and/or have some type of technology advantage.

 

I agree, the general method is to high-frequency market-making approach using cheap commissions and multiple accounts but I can't imagine these traders even remotely close to that level of sophistication.

 

Perhaps its some spread between the ADR and the base index? I thought I read in a paper ADRs due follow the local index during the trading day and perhaps they revert to the base index. So US equities rising, ADR rising, DAX is flat, short ADR?? I am grasping at straws but as I find out more I'll post...