Friday, 9 September 2011

ArbMaker: Pairs trading with cointegration made easy

Nine months without a post and no baby to show for it.

Well, there is a baby of sorts. I've been taking a nice stat arb trading app through its paces - and it is not bad. Actually, it's far better than that.

ArbMaker - they were struggling for a title, clearly - but it does produce the goods. Screenshot:

That's WGL Holdings, Inc (WGL) versus Western Gas Partners, LP (WES), both natural gas utilities state-side. The basic message of those oscillating graphs is that the pair are locked in a long term relationship and that, today, WGL looks expensive relative to WES. And, as a result, I'm off to check out the validity of the message with my own methods.

Now, this software runs on cointegration and its goal is to produce linear combinations of companies' prices series that (it is hoped) revolve neatly about the x-axis and, from time to time, signal trading entries based on standard deviations.

There is an awful lot of stat going on to validate matters and the versatility is impressive. It is a tool to complement other analyses (in my view) and, as far as I know, it is the first retail product of the cointegrating trading type on a par (and in not a few cases superior) to custom built systems costing well-north of $25k.

The responsibles have a beta program due to get going next month - anyone can sign up - and a backtester is due before year-end. The web site is here. It's to be a subscription model and while no prices have been announced yet I'd be guessing something between $125 - $150 per month.

All I know is someone owes me a glass of red...or at least a complimentary sub.

NB: DBS hereby discloses a financial investment in the firm behind this application!

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