Why Cross-Exchange Futures Hedging Cannot Transfer Assets
Summary
The document argues that trading opposite positions across two exchanges cannot reliably move value from one account to another. Its central reasoning is that if a strategy can produce a stable loss at one venue and gain at another, the losing venue should not be necessary to the strategy, which contradicts the premise. It then explains the market mechanics: the described account-to-account transfer schemes depend on one account placing unfavorable orders that another account can fill in the same order book. The second account captures liquidity supplied at the first account’s expense.
Because separate exchanges have separate order books, a trader cannot assume that one venue’s deliberately poor quotes will provide fills to an account on another venue. The document distinguishes this from manipulating the price used in a contract’s pricing formula, which might create gains on that venue under certain assumptions. However, those gains would remain there and would not solve the withdrawal problem. The discussion is conceptual and provides no measured trading data; the price-manipulation idea is presented as a conditional possibility, not a tested strategy.
Key ideas
- Opposite positions on separate exchanges do not create a mechanism for one venue’s losses to fund another venue’s gains.
- The described account-transfer tactic relies on one account providing poor quotes that another account fills in the same order book.
- Separate exchanges have independent order books, so liquidity supplied on one venue is not directly available on another.
- Manipulating a contract’s reference price would require knowledge of its pricing formula and would leave any resulting gains on that venue.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.