Skip to main content
- Ex post arbitrage trading on the German intraday market for 15 minute contracts on order book data in comparison to a greedy trading approach is defined and analysed.
- The ex post algorithm trades much more and mainly neighbouring contracts close to gate closure, whereas the greedy algorithm starts trading too soon, but has comparable profits per position change.
- While the profit of the ex-post algorithm increases by 25 – 40% for a halving of the trading period length, the profit from the greedy approach stays nearly the same.
- The impact of non-execution of some orders for small risk levels is almost negligible, since there are enough profit possibilities, and possible future trades are not blocked by the non-execution.
Pair trading on the German intraday power market is a commonly used risk-averse, heuristic trading strategy. However, due to myopic decision-making and a lack of foresight, the profit obtained is far from optimal. By comparing this strategy with the ex post optimal solution (ie, a strategy with perfect foresight), we show on a set of 15 selected days from 2020 to 2022 that the predictive information lets us generate on average more than five times as much profit by excessively buying and selling the same contracts for a trading interval of five minutes. Another problem with pair trading in practice is the possibility of unbalanced auction wins. We show that an unbiased loss of up to 10% has a negligible impact on the obtained profit. In contrast, we also show the value of frequent optimization updates by simulating strategies with only sporadic participation in the market. While this is hardly beneficial for the pairtrading strategy, the ex post optimal profit increases on average by 30% when the time between two trades is halved.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.