Spot vs Future Arbitrage

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Is spot vs future arbitrage possible in XAUUSD? will slippage cause the issue?
 
Kuldeep Krishnat Konde:
Is spot vs future arbitrage possible in XAUUSD? will slippage cause the issue?
theoretically it is possible, but practically, it’s extremely hard to execute profitably, even with perfect execution, don't expect to be profitable. And that's right, slippage is one of the main killers. 
You got the right idea.

Think of it as like this: 
This isn’t a strategy, it’s Kinda be like a war of latency. Cuz you’re not competing on market logic or whatsoever. You're competing on the execution speed, and that’s where retail loses.
So don't try to outsmart the market. Just why you wanna do that??
 
You need ultra fast execution if you want to have a single chance to succeed in that
 
It is possible but yeah the slippage. I mean you can get orders sent in milliseconds but if the fills get delayed like at all you're done. I have used anti-clustering techniques in my work so I know you can break it all down to millisecond zones but anything can cause slippage on any broker.  
 
Kuldeep Krishnat Konde:
Is spot vs future arbitrage possible in XAUUSD? will slippage cause the issue?

Spot FX-FX futures arbitrage is commonly exploited by institutional traders. In fact, a founding executive at the FX broker-dealer that I use formerly arbitraged spot FX with FX futures. Of course, he was not trading CFD's masquerading as futures─he was trading real CME futures and interbank FX.

Getting back to the issue at hand, XAU is technically not a currency. In my location, the only spot gold contract is a synthetic contract─an aggregated price derived from miners' stocks, etc. as USGOLD with zero leverage. In many other locations, the XAUUSD CFD is available with leverage. Due to the lack of transparency regarding CFD's, it's tough to definitively say from what its price is truly derived. Based on my observations of a live GC (CME gold futures) price feed and a demo XAUUSD price feed (the only feed that I can access), XAUUSD tracks GC very closely. At most times, the XAUUSD spread, smaller GC spread, and GC commissions would wash out any arbitrage profit. Keep in mind that a live XAUUSD spread could be even higher.

The obvious alternative, would be... "when in Rome, do as the Romans do." For example, CME FX futures such as CME EURUSD futures are more volatile than spot EURUSD. Also, the spread on spot EURUSD tends to be low. Presumably, this is why the aforementioned FX executive arbitraged FX instruments and not commodities instruments.

 

I think part of the confusion here comes from how spot FX actually works compared to futures. According to EBC Financial Group, spot forex transactions are typically settled T+2, so even though we see something like EUR/USD at 1.0850 as the “current” price, it’s still based on how the interbank market operates rather than a centralised exchange like futures. Also, most of the volume is still in spot. BIS data from 2022 showed around $7.5 trillion in daily turnover, with the majority coming from spot transactions. So naturally, pricing and liquidity are concentrated there. Because of that, arbitrage between spot and futures isn’t just about spotting a price difference. By the time you factor in spreads, execution speed, and slippage, that gap usually disappears pretty quickly. So yeah, theoretically possible, but in reality it’s more of an execution game — and that’s where retail tends to struggle.

 
Eloise Quinn #:
Also, most of the volume is still in spot. BIS data from 2022 showed around $7.5 trillion in daily turnover, with the majority coming from spot transactions.
Yeah, everyone likes to throw around that 7.5 trillion number in the FX industry. In reality, most retail "FX" traders' capital never comes into contact with the interbank market because they're actually trading CFD's─which are not connected to any global interbank market nor centralized exchange. Your "market" is limited to your broker-dealer, it's immediate partners, and other retail traders when you trade CFD's. There's a case to be made that CFD's are not actually FX products─despite how broker-dealers advertise them.
 
Sotirios Apostolos Adaloglou #:
You need ultra fast execution if you want to have a single chance to succeed in that
How can I achieve that? even I use better VPS there is a occurance of slippage
 
Ryan L Johnson #:
Yeah, everyone likes to throw around that 7.5 trillion number in the FX industry. In reality, most retail "FX" traders' capital never comes into contact with the interbank market because they're actually trading CFD's─which are not connected to any global interbank market nor centralized exchange. Your "market" is limited to your broker-dealer, it's immediate partners, and other retail traders when you trade CFD's. There's a case to be made that CFD's are not actually FX products─despite how broker-dealers advertise them.
True — the “7.5 trillion” number is often used loosely, and most retail FX flow is really CFD trading, not direct access to the interbank market.
But calling CFDs “not FX” is a bit too strong; they’re still synthetic FX exposure, just routed through the broker’s pricing and liquidity setup.
 
Kuldeep Krishnat Konde #:
How can I achieve that? even I use better VPS there is a occurance of slippage
Look into co-located servers offered by some broker-dealers. For example, trade with a spot FX broker-dealer having a trade server in Aurora/Chicago a CME Futures broker-dealer in Aurora Chicago (the exchange data center is in Aurora), and a co-located VPS in Aurora/Chicago.
 
Kuldeep Krishnat Konde #:
[C]alling CFDs “not FX” is a bit too strong; they’re still synthetic FX exposure, just routed through the broker’s pricing and liquidity setup.

Each CFD broker-dealer creates its own products and prices in parallel to the interbank FX markets, and names their products after FX instruments. Interbank market trades are not routed in from outside of a CFD broker-dealer's pool. Yes, synthetic is the key word.

If you read a CFD broker-dealers disclosures/terms, that is no secret.

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