Moritz Seibert discovered an opportunity to exploit a price discrepancy in DAX warrants by buying from banks and selling on the exchange for profit.
Moritz took advantage of banks' slow updating of volatility surfaces to identify mispriced warrants and profit from their eventual price adjustment.
Banks employed various tactics to hinder Moritz's trading strategy, including widening bid/ask spreads and claiming system issues, ultimately leading to the end of his arbitrage opportunity.
Deep dives
The Market Inefficiency: Tight Bit/Ask Spread in Warrants
Moritz discovered that the banks were quoting a too tight bit/ask spread for DAX warrants compared to the fair market spread. This created an opportunity for him to exploit the price discrepancy by buying warrants from the banks and selling them on the exchange for a profit.
The Inefficient Volatility Surface Update Process
Moritz noticed that banks were slow in updating their volatility surfaces in response to changes in the market. This delay allowed Moritz to identify mispriced warrants when the banks' volatility surfaces didn't accurately reflect the true market conditions. He took advantage of this by buying mispriced warrants with the expectation that the banks would update their volatility surfaces and drive up the prices, allowing him to sell the warrants back to them for a profit.
The Game of Chicken and Manipulation Tactics
As the banks became aware of Moritz's trading strategy, they employed various tactics to prevent him from profiting from their mispriced warrants. They widened bid/ask spreads, stopped quoting prices for specific warrants, and even claimed there were fire drills or system issues to delay his trades. Moritz was forced to engage in conversations with the banks, leverage regulatory rules, and endure their attempts to keep him in losing positions. Eventually, the banks caught on to his strategy and made it increasingly difficult for him, leading to the end of his arbitrage opportunity.
Exploitation of a Thinly-Quoted Warrant Market
The podcast episode discusses the speaker's initial discovery of a thinly-quoted warrant market while browsing different banks' websites. The speaker realized that the warrants were being quoted at a too tight spread, providing an opportunity for exploitation. Although the speaker recognized the warrants were generally more expensive than what they could trade on UREX, they noticed a consistent pattern of the warrants being priced too cheaply. The speaker developed a strategy to take advantage of this by quickly getting in and out of trades and exploiting the banks' slower updating of volatility markets.
The Challenges and Execution of the Strategy
The speaker described the challenges and execution of their trading strategy, which involved constantly monitoring the volatility market and responding quickly to changing conditions. The speaker used a spreadsheet to pull real-time data from various sources, comparing the prices of the warrants with the fair market prices on UREX. The speaker relied on alarms and statistical analysis to identify when the warrants became relatively cheap and when a market move was favorable for their strategy. They explained the process of executing trades, including selecting strikes, calculating position sizes for delta neutrality, and using pre-market and post-market trading opportunities to trade on short volatility products.
It contains no chatter about how to read charts, how to pick the direction of stocks, or even, how to handle your trading psyche.
However, for some, this episode will spin minds and bend preconceived notions about trading. It shines a spotlight on what happens should you uncover a structural inefficiency that can be exploited, as was the case with today’s guest Moritz Seibert.
Many know of Moritz as a trend following guy and someone with vested interests in the crypto market, but (almost) no one knows he was once arbitraging warrants on Germany’s DAX. It was an extreme edge, and he traded it rigorously for three years.
Moritz has never publicly spoken about the arbitrage, until now! Over the course of this recap, he details all aspects: the market, the inefficiency, the trade, and the—inevitable—decay.
To read the assisting article by Moritz: Click here
