# Trading the spread with dual listed company warrants



## rodg2061 (21 September 2006)

Hi,

I read an interesting article in the AFR last week, "Profit from a global arbitrage", (AFR 13-09-2006, p32). It described a technique for using dual listed company (DLC) call warrants to trade the spread between the two underlying stocks, listed on different exchanges but issued by the same company, when arbitrage opportunities emerge. They effectively allow you to trade the overseas listed shares in Australia, in the local time zone, in Australian dollars.

However when I looked into the liquidity of these warrants, they turned out to be extremely illiquid, and traded only on small trades with huge volumes (see ZBHWXA and ZBHWSA). So is this the domain only of institutional investors ? Sorry if this is a dumb question, it's just something that caught my interest, and I'm relatively new to derivatives. Are there other techniques for trading the spread between DLC's, which get around the time zone problem ?

Many thanks,
Rod


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## Magdoran (24 September 2006)

rodg2061 said:
			
		

> Hi,
> 
> I read an interesting article in the AFR last week, "Profit from a global arbitrage", (AFR 13-09-2006, p32). It described a technique for using dual listed company (DLC) call warrants to trade the spread between the two underlying stocks, listed on different exchanges but issued by the same company, when arbitrage opportunities emerge. They effectively allow you to trade the overseas listed shares in Australia, in the local time zone, in Australian dollars.
> 
> ...



Hello Rod,


Let me flesh out my own experience in dealing with this kind of scenario (so this is a general treatment of how the mechanics work with an actual example).

I thought along the same lines of trying to exploit arbitrage opportunities with BHP too a few years ago considering the UK price was often priced differently to the Australian counterpart (yet had the same yield).  In fact there were a team of us who were private investor/traders (a good friend was based in London at the time) who spent a lot of time trying to work out if there was an arbitrage opportunity available.

We figured that it was likely that if there was an opportunity that arbitrage units of larger institutions would have exploited the conditions, but we still thought it was worth considering.  So, we set about researching the situation of dual listing and examined a range of financial instruments that could potentially present a vehicle to profit from the price differential.

Unfortunately the UK listed share is not convertible with the Australian listed version, so even trading warrants etc is based on the valuation of the underlying you are trading.  So if you tried to buy a warrant that was linked to the UK listing of Billiton, the price is tied to the price movements of Billiton, not the BHP listing in Australia.

The conclusion we came to was that the only real benefits were for the larger holders who may shift their holdings between the two exchanges if they were looking for dividend returns, hence adjustments were probably made around these times.

Generally the problem with trying to use some instruments out of hours is that an issuer or market maker may factor in current price movements which will influence the bid and the ask if they are structured this way.  A financial player is hardly likely to leave a free hit open to the market.  If they did so, they wouldn’t be in business for long.  

However, it is possible that arbitrage vehicles do exist, and there are always opportunities floating by all the time.  But remember that there are whole organisations that have considerable resources committed to taking advantage of mispricings in the market, and competing with these professional outfits requires that you have an edge.  If you have one, great, but if you’re new to this, consider that many of the established players do this professionally and have been doing it often for many years.  They are fully resourced and committed.  

That doesn’t mean you can’t find a way to beat them, but consider your preparation, experience, and innate capacity to theirs, and make a realistic estimation of your probability for success.  If your preparation and/or experience is limited, consider addressing these aspects before committing substantial capital, and expect that participating effectively in this area of the market requires a significant edge to succeed.


Regards


Magdoran


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## lesm (24 September 2006)

Magdoran said:
			
		

> Hello Rod,
> However, it is possible that arbitrage vehicles do exist, and there are always opportunities floating by all the time.  But remember that there are whole organisations that have considerable resources committed to taking advantage of mispricings in the market, and competing with these professional outfits requires that you have an edge.  If you have one, great, but if you’re new to this, consider that many of the established players do this professionally and have been doing it often for many years.  They are fully resourced and committed.
> 
> That doesn’t mean you can’t find a way to beat them, but consider your preparation, experience, and innate capacity to theirs, and make a realistic estimation of your probability for success.  If your preparation and/or experience is limited, consider addressing these aspects before committing substantial capital, and expect that participating effectively in this area of the market requires a significant edge to succeed.
> Magdoran



Hi Rod,

Just to add to Magdoran's comments.

There are automated systems running that are scouring the markets looking for inefficiences and potential arbitrage situations. The view is that the potential to identify these situations has been reduced. If they are discovered they will be short lived, as they will be exploited on discovery, by the forementioned systems.

This adds to the competiton in the markets and as Magodran mentioned, you are up against very experienced organisations/professionals with far more resources at their disposal.

Not to say you may or may not find some, but possibly not as easy as the article alluded to, especially for new players.

Cheers.


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