Index arbitrage

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Index arbitrage is a subset of statistical arbitrage focusing on index components.

The idea is that in an index (such as S&P 500) is made up of several components (in the example, the Top 500 US biggest firms by market capitalization) that influence the index price in a different manner.

For instance, there are leaders (components that react first to market impact) and laggers (the opposite). As the index is the weighted sum of all components, identifying leaders and laggers can provide a proprietary trader can take position in these to make money if he believes the laggers will eventullay rally on the leaders. The challenge being of course to correctly identify these, and have the technology to act on the market place before the price correction takes place.

Other types of index arbitrage include basis trading, the arbitrage between a current index value (synthetically replicated) and that of its future.

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