Profiting from Bid/Ask spread

Honeyoak · March 30th, 2011, 4:45 am

lets say that I know that a security's bid/ask spread widens at certain times of the day. how could I profit by being a liquidity provider during this time? I find that certain currencies (I am looking at NZD/AUD right now) have incredibly deterministic spikes in the spread at the 1 minute level. I suspect this has to do with badly written algorithms/rules of thumb. is there any way of hedging the underlying and only betting on the spread?

zeckpromic · March 30th, 2011, 8:45 am

try to hedge against derivatives ...

Honeyoak · March 30th, 2011, 1:31 pm

that's very interesting outrun. I didn't think of the micro-structure that way. I wonder if you can exploit the differences in various pairs due to the same shock or find some other way to carry over liquidity. These are some charts that show what you observe in the tick data:http://fxtrade.oanda.com/why/spreads/recent

ogarbitrage · March 30th, 2011, 4:34 pm

The Mirage of Triangular Arbitrage in the Spot Foreign Exchange MarketFenn, Howison, McDonald, Williams, & JohnsonPaper discusses the larger spreads during specific market hours.