Trading - Critique this

[tastyorange]

Going long/short on bank ADR shares before the market opens after gauging their UK performance in the morning session.

The direction always seems to correlate.

Your thoughts?

Edited by tastyorange on Tuesday 17th March 14:48

[walm]

Genius.
No one has ever thought of this before.
Guaranteed free money.


Oh wait...
Perhaps, just perhaps, there might be literally billions ready and waiting to arb out any tiny discrepancy between the ADR and the local share... no... that would never happen.

OK enough sarcasm - to be honest I have never checked with actual numbers - the above "critique" is based on the fact that:
1. Your scheme is obvious.
2. There actually are HFT funds set up to eek out any tiny alpha from the minor dislocations, should they exist for a microsecond.
3. I strongly doubt you have back-tested this with real numbers.

Take BT today.
The ADR opened at $66.07 today (down 1.8% from the close yesterday).
Cable is at 1.475 so that is £44.8 per ADR.
ADRs are 10:1 for the UK ORD. So £4.48 per UK share.
Which happens to be the exact price the UK share was trading at, at 1.30 UK time today (when the US market opened).

I think you think that you could look at the move in BT over the day in the UK before the US opens and then buy ADRs at the OLD price (where they closed yesterday).
Unfortunately no one is going to sell them to you at the old price because the CURRENT price is set by what you can buy them for in the UK.
So the instant the US market opens, the price matches the UK price.

[technogogo]

Plus the currency costs added by most platforms create a significant headwind to trading. it can be around 2%. So a share has to increase by 2% or so before you can sell it and get your money back after conversion back to sterling.