Index arbitrage is a subset of statistical arbitrage focusing on index components. The idea is that an index (such as S&P 500 or NSE-ASI) 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 with the opportunity to take positions in these and make money if he/she believes the laggers will eventually rally on the leaders. The challenge being of course to correctly identify these and to have the technology to act in the marketplace before the price correction takes place.
A premium profile on www.broadstreetlagos.com gives you access to the data you need for the stock market. Over the next few weeks we will discuss more phrases.
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