#arbitragetrading

I started pairs trading when I got into full-time trading in 2001. I was a 100% market-neutral trader.

Why did I start with pairs trading?

It was one simple reason: my mentor Steinar, a fellow Norwegian who had lived and traded in Chicago, traded pairs and merger arbitrage.

Steinar was a successful trader. (The best you can do as a trader is to get a foot inside an office or get in touch with people who are profitable.)

My pairs trading strategies gave me a good starting point.

At the time, pairs trading was highly likely much more profitable than it is today.

I traded only stocks listed on NYSE – no NASDAQ pairs.

At the time, the specialist on the NYSE floor had a lot of power, and most of the trading went through those firms.

The specialist’s job was to create a fair and orderly market and to fill big positions.

The specialist system often meant I got price improvements:

If I had a bid at 50.25 and the specialist received a sell order for 40 000 shares, he might “sweep” all the bids and fill the order at 50.05.

Thus, I managed to buy at 50.05 instead of 50.25.

If I were filled, I could either be long or short the other stock to make a “market-neutral” position.

It’s unlikely that you'll get such a price improvement anymore.

At the time, you could only short on rising prices, so getting a short might be difficult.

Hence, we bought “bullets” (using options so we could sell – not short).

I can recall some of the most popular pairs at the time:

RDC / ESV SII / BJS BHI / SLB FRE / FNM ETG / EVT RQI / RPF BSC/LEH MS/GS STT/STI

Traders starting out today will notice that many of the tickers no longer exist.

All pairs were traded intraday, ie. as day trades.

I stopped pairs trading in 2005 because I found better strategies, and most likely I didn’t manage to adapt to the dynamics of pairs trading.

However, even today, after pairs trading has been around for over three decades and the most obvious edges are “arbed” away, there are still profitable pair traders out there. I still believe Bright Trading has a pairs trading group.